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MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS

Explore the role of physical assets as inputs and collateral, dual function in production. Study the LAPM model and its implications on liquidity premia and asset pricing in macroeconomics. Analyze the impact on financial markets, multiple equilibria, and debt capacity.

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MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS

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  1. MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS 2. Dual role of physical assets as input and collateral. 3. LAPM. 10th set of transparencies for ToCF

  2. KIYOTAKI - MOORE JPE 1997 Basic idea: • one store of value, that is also an input into production process. "Commercial real estate", price p at date  • possibility of multiple equilibria (and cycles)

  3. MODEL Two goods : • Non durable ( endowment each period) • Durable: real estate A units Can be used as Commercial Residential • Investors: receive endowment at beginning of Preferences: All agents have linear preferences: Only store of value Two classes of agents • Entrepreneurs: no endowment must borrow entire investment (non durable good); but can hold real estate from last period (actually hold entire real estate in equilibrium).

  4. a in case of failure if success Production technology • Entrepreneur starting at t with a units of real estate. Invests / borrows i of date-t good. Requires of commercial real estate. rented as residential real estate at rental rate income • demand for residential real estate consumption of residential real estate date t Contract • Rbin case of success + assets a to borrower • lenders receive

  5. End-of-period market for real estate • investors sell assets they have seized • successful entrepreneurs buy more • Equilibrium No aggregate uncertainty deterministic path • Continuation valuation of an entrepreneur starting with a at the beginning of date t : arbitrage • Debt capacity: and

  6. Note: (net suppliers) where • Real estate market or

  7. MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS 3. LAPM : Liquidity Premia and Asset Pricing

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