Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 61 views

    Monetary Economics Credit Cycles - The Kiyotaki Moore Model: Nicola Viegi

    Uploaded by

    Brian Magno Ordoñez Mangualaya
    The document summarizes the Kiyotaki Moore model of credit cycles. The model includes productive and unproductive agents, where productive agents use capital to produce output subject to a credit constraint. Fluctuations in asset prices can propagate and amplify shocks, leading to endogenous business cycles. The model generates comovement in credit, asset prices, and output without changes in technology.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Monetary Economics Credit Cycles - The Kiyotaki Moore Model: Nicola Viegi

    Uploaded by

    Brian Magno Ordoñez Mangualaya
    61 views15 pages
    The document summarizes the Kiyotaki Moore model of credit cycles. The model includes productive and unproductive agents, where productive agents use capital to produce output subject to a credit constraint. Fluctuations in asset prices can propagate and amplify shocks, leading to endogenous business cycles. The model generates comovement in credit, asset prices, and output without changes in technology.

    Original Title

    lec6

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document summarizes the Kiyotaki Moore model of credit cycles. The model includes productive and unproductive agents, where productive agents use capital to produce output subject to a credit constraint. Fluctuations in asset prices can propagate and amplify shocks, leading to endogenous business cycles. The model generates comovement in credit, asset prices, and output without changes in technology.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    61 views15 pages

    Monetary Economics Credit Cycles - The Kiyotaki Moore Model: Nicola Viegi

    Uploaded by

    Brian Magno Ordoñez Mangualaya
    The document summarizes the Kiyotaki Moore model of credit cycles. The model includes productive and unproductive agents, where productive agents use capital to produce output subject to a credit constraint. Fluctuations in asset prices can propagate and amplify shocks, leading to endogenous business cycles. The model generates comovement in credit, asset prices, and output without changes in technology.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 15

    Monetary Economics

    Credit Cycles - The Kiyotaki Moore Model

    Nicola Viegi

    University of Pretoria

    March 2010

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 1 / 15


    Introduction

    Crisis shows centrality of …nancial market


    Objective of this lecture - introduce …nancial intermediaries in a macro
    model
    The Microeconomics of Banking (to be done in reading groups)
    Diamond Dybvig Model - A Model of Bunk Runs
    Holstrom and Tirole Model - The Role of the State in Providing
    Liquidity

    This lecture
    Stiglitz and Weiss Model - Imperfect Information and Financial
    Transactions
    Kiyotaki Moore Model - The Business Cycle E¤ects of Credit Market
    Imperfections

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 2 / 15


    Credit Market Imperfection - the Stiglitz Weiss Model

    Expected Value of Investment Project

    pi Ris + (1 pi ) R f = R
    Banks lend B = K W and get (1 + r )B in case of success and R f in
    case of failure.
    Assume that Ris > (1 + r )B > R f for all i.
    Asymmetric info: entrepreneur knows his pi the bank does not.
    Pro…ts

    Firm : E (π i ) = pi [Ris (1 + r )B ]
    Z p Z p
    Bank : E ( π b ) = (1 + r )B pi g (pi ) dpi + R f (1 pi ) g (pi ) dpi
    0 0

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 3 / 15


    Credit Market Imperfections

    Express the expected payo¤ π i as :


    h i
    f f
    E (π i ) = R R pi (1 + r )B R

    which is decreasing in pi :
    high risk investors are willing to pay more for a loan, but then dp/dr < 0.
    Impact on Banks
    Z p
    dE (π b )
    = B pi g (pi ) dpi +
    dr 0
    dp h i
    + (1 + r ) Bpg (p ) + R f (1 pi ) g (p )
    dr
    Optimal Respone of the Bank - Collateral

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 4 / 15


    Credit Market Imperfections

    Credit Demand

    Credit Supply
    Interest Rate

    Expected Bank Return

    Interest rate signal of riskness


    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 5 / 15
    Credit Market Imperfection and the Business Cycle - the
    Kyotaki Moore model

    Credit Market Imperfections in a general equilibrium model - Kiyotaki


    and Moore
    it produces comovement of amount of credit, asset prices and
    aggregate output,
    it creates a propagation mechanism that produces persistence and
    ampli…cation of a shock,
    it produces procyclical productivity even if technology does not change,
    it is able to explain cross-industry comovements.

    Quite Complex - Need di¤erentiated agents

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 6 / 15


    Credit Cycles

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 7 / 15


    The Model

    a constant interest rate (one less variable)


    no labor supply decision
    no capital accumulation
    only one asset that can be used for production, and is available in
    …xed supply in the aggregate.

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 8 / 15


    The Model

    The model includes two kind of agents, productive (farmers) and


    unproductive (gatherers). The expected utilities of farmer and gatherers
    are respectevely

    !
    ∞
    Farmers : E ∑ βs xt +s
    s =0
    !
    ∞
    Gatherers : E ∑ β0s xt0+s
    s =0

    where β0 > β .

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 9 / 15


    The Model II

    The productive agents use a linear production tecnology in capital only as,

    yt = (a + c ) kt 1

    a fraction ckt 1 of the produced goods is untradable so that the ”farmer”


    must consume it on his own.
    The productive agent is subjected to a credit constraint like

    Rbt = qt +1 kt

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 10 / 15


    The Model

    basic expression for the ‡ow of funds

    qt (kt kt 1 ) + φ (kt λkt 1 ) + Rbt 1 + xt ckt 1 = akt 1 + bt

    where φ (kt λkt 1) denotes an input for reproduction of capital.

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 11 / 15


    The Model

    Only a fraction π of the population can invest while a fraction (1 π )


    cannot.
    For a farmer, investment is strictly better than consumption, so that it will
    use all the funds available to invest, so that xt 1 ckt 1 and Rbt = qt +1 kt
    are binding.
    Substituting these in the ‡ow of funds and rearranging we have:
    qt +1
    qt + φ kt = (α + λφ + qt ) kt 1 Rbt 1
    R
    On the other hand, non productive capital is just depreciating, so that
    kt0 = λkt0 1 .

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 12 / 15


    The Model
    Combining these two law of motion, we get the aggregate capital law of
    motion

    π
    Kt = ( 1 π ) λKt 1 + q t +1 [(α + λφ + qt ) kt 1 Rbt 1]
    qt + φ R
    (1)
    Aggregate debt follows

    Bt = RBt + qt (Kt Kt 1 ) + φ (Kt λKt 1 ) aKt 1


    1 (2)
    Finally, the Euler equation for consumption (a bit atypical), which
    determine the asset price
    qt +1
    u (Kt ) = qt
    R
    where u (Kt ) is the user cost of capital = G 0 (K Kt ) /R (explained in
    the paper). These equations are a …rst-order non-linear system. There is
    an unique steady state (q , K , B ) with associated steady state user cost
    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 13 / 15
    Business Cycle Dynamics

    0.3

    0.25

    B/B*
    0.2

    K/K*

    0.15

    0.1 q/q*

    0.05

    -0.05
    0 10 20 30 40 50 60 70 80 90
    time

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 14 / 15


    Conclusions

    Real Business Cycle with large endogenous ‡uctuations


    Credit + Imperfect information = …nancial accelarator mechanism
    Next - Introducing …nancial frictions in a monetary model with sticky
    prices and monopolistic competition

    Viegi (University of Pretoria) Credit Cycles Lecture 5 March 2010 15 / 15

    You might also like