TCF-set 10

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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
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).
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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

consumption of residential real estate
date t

Contract

• Rb in case of success assets a to borrower

• lenders receive

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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
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where

• Real estate market

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