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COLLATERAL CONSTRAINT AND NEWS-DRIVEN CYCLES

Published online by Cambridge University Press:  09 January 2012

Keiichiro Kobayashi ,
Tomoyuki Nakajima  and
Masaru Inaba
Keiichiro Kobayashi*
Affiliation:
Hitotsubashi University Canon Institute for Global Studies and Research Institute of Economy, Trade and Industry
Tomoyuki Nakajima
Affiliation:
Institute of Economic Research, Kyoto University
Masaru Inaba
Affiliation:
Canon Institute for Global Studies
*
Address correspondence to: Keiichiro Kobayashi, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo 186-8603, Japan; e-mail: [email protected].
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Abstract

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.

Keywords

News-Driven CyclesCollateral ConstraintsTobin's QBankruptcies
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Issue 5 , November 2012 , pp. 752 - 776
Copyright
Copyright © Cambridge University Press 2012

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