On the amplification role of collateral constraints

This letter explores the role of costly liquidation of the collateralized asset in a stochastic version of the Kiyotaki and Moore (1997) model. We document that the degree of inefficiency in the debt enforcement procedure plays a key role in the endogenous amplification of productivity shocks genera...

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Bibliographic Details
Published in:Economics letters 2012-11, Vol.117 (2), p.429-435
Main Author: Mendicino, Caterina
Format: Article
Language:English
Subjects:
Business cycle
Business cycles
Collateral
Company insolvency
Debt enforcement procedures
Economic models
Economic shock
Endogenous borrowing limits
Liquidation
Productivity
Stochastic models
Studies
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Summary:This letter explores the role of costly liquidation of the collateralized asset in a stochastic version of the Kiyotaki and Moore (1997) model. We document that the degree of inefficiency in the debt enforcement procedure plays a key role in the endogenous amplification of productivity shocks generated by collateral constraints. ► Amplification role of collateral constraints crucially depends on collateral value lost in debt enforcement procedures. ► Costly debt enforcement generates sizable amplification and persistence. ► Debt enforcement effect is independent from other parameters.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2012.06.007