MACROECONOMIC IMPLICATIONS OF

FINANCIAL CONSTRAINTS

2. Dual role of physical assets as input and collateral.3. LAPM.

10th set of transparencies for ToCF

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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)

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MODEL

Preferences: All agents have linear preferences:

Can be used as

Commercial Residential

Only store of value

Two classes of agents

receive endowment at beginning of Investors:

Two goods : Non durable ( endowment each period)

Durable: real estate A units

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).

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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

date t

consumption of residential real estate

Contract• Rb in case of success + assets a to borrower• lenders receive

a in case of failure

if success

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No aggregate uncertainty deterministic path

End-of-period market for real estate investors sell assets they have seized successful entrepreneurs buy more

Continuation valuation of an entrepreneur starting with a at the beginning of date t :

arbitrage

and

Equilibrium

Debt capacity:

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where

or

Real estate market

Note: (net suppliers)

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MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS

3. LAPM : Liquidity Premia and Asset Pricing

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