TY - JOUR
T1 - Collateral constraint and news-driven cycles
AU - Kobayashi, Keiichiro
AU - Nakajima, Tomoyuki
AU - Inaba, Masaru
N1 - Funding Information:
We thank seminar participants at RIETI, University of Tokyo, the 2007 SED Annual Meeting (Prague) for their helpful comments. All remaining errors are ours. This research was partially supported by the Japanese Ministry of Education, Science, Sports, and Culture (Grant-in-Aid for Scientific Research). The views expressed herein are those of the authors and not necessarily those of the Research Institute of Economy, Trade and Industry.
PY - 2012/11
Y1 - 2012/11
N2 - We develop business-cycle models with financial constraints, the driving force of which is news about the future (i.e., changes in expectations). We assume that an asset with fixed supply ("land") is used as collateral, and firms need to hold collateral to finance their input costs. The latter feature introduces an interaction between the inefficiencies in the financial market and in the factor market. Good news raises the price of land today, which relaxes the collateral constraint. It, in turn, reduces the inefficiency in the labor market. If this force is sufficiently strong, the equilibrium labor supply increases. So do output, investment, and consumption. Our models also generate procyclical movement in Tobin's Q. We also show that when the news turns out to be wrong, the economy may fall into a recession.
AB - We develop business-cycle models with financial constraints, the driving force of which is news about the future (i.e., changes in expectations). We assume that an asset with fixed supply ("land") is used as collateral, and firms need to hold collateral to finance their input costs. The latter feature introduces an interaction between the inefficiencies in the financial market and in the factor market. Good news raises the price of land today, which relaxes the collateral constraint. It, in turn, reduces the inefficiency in the labor market. If this force is sufficiently strong, the equilibrium labor supply increases. So do output, investment, and consumption. Our models also generate procyclical movement in Tobin's Q. We also show that when the news turns out to be wrong, the economy may fall into a recession.
KW - Bankruptcies
KW - Collateral Constraints
KW - News-Driven Cycles
KW - Tobin's Q
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U2 - 10.1017/S1365100510000829
DO - 10.1017/S1365100510000829
M3 - Article
AN - SCOPUS:84869179762
SN - 1365-1005
VL - 16
SP - 752
EP - 776
JO - Macroeconomic Dynamics
JF - Macroeconomic Dynamics
IS - 5
ER -