Working Paper: NBER ID: w19009
Authors: Venky Venkateswaran; Randall Wright
Abstract: When limited commitment hinders unsecured credit, assets help by serving as collateral. We study models where assets differ in pledgability - the extent to which they can be used to secure loans - and hence liquidity. Although many previous analyses of imperfect credit focus on producers, we emphasize consumers. Household debt limits are determined by the cost households incur when assets are seized in the event of default. The framework, which nests standard growth and asset-pricing theory, is calibrated to analyze the effects of monetary policy and financial innovation. We show that inflation can raise output, employment and investment, plus improve housing and stock markets. For the baseline calibration, optimal inflation is positive. Increases in pledgability can generate booms and busts in economic activity, but may still be good for welfare.
Keywords: Pledgability; Liquidity; Monetary Policy; Financial Innovation; Economic Activity
JEL Codes: E41; E43; E44; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limited commitment (D10) | hinder unsecured credit (G51) |
| increased pledgability of assets (G32) | enhance ability to secure loans (G21) |
| enhance ability to secure loans (G21) | affect liquidity (E44) |
| inflation (E31) | increase output (E23) |
| inflation (E31) | increase employment (J68) |
| inflation (E31) | increase investment (E22) |
| higher inflation rates (E31) | incentivize agents to substitute real balances for pledgeable assets (E41) |
| inflation (E31) | raise nominal returns on illiquid assets (G19) |
| inflation (E31) | reduce real returns on bonds and capital (G12) |
| increases in loan-to-value ratio (G21) | stimulate economic expansion (E65) |
| increases in loan-to-value ratio (G21) | lead to subsequent downturns (E32) |