Collateral secured loans in a monetary economy

Mathematics and Computers in Simulation, 2009

We study an infinite-horizon economy with incomplete markets where default is explicitly allowed, contrary to the GE 1 model (where default is ruled out by assumption). The time and uncertainty are modeled by a countable infinite event-tree with a unique initial node at initial date, and with a continuum of branches at each node of the tree. If we allow agents to sell promises subject to the purchase of durable goods serving as collateral, then it is possible to prove the existence of equilibria without imposing either constraint on agent's asset holdings, or assumption on ex post endowments. The proof is independent of the manner in which households discount the future.

2002

I review in this paper some recent literature that deals with the coexistence of inside and outside money in a matching model of money à la Kiyotaki and Wright. I examine first a class of models that introduce credit by assuming that some agents' actions can be monitored and punished by the other agents in the economy. I then turn to a model in which agents can (costly) commit to keep their promises. I also analyse a literature that introduces banks and private money in the model, to evaluate the Hayek-Friedman debate on the private vs. public provision of money. The very last part of the paper is devoted to the issue of coexistence of money and nominal bonds with a higher rate of return.

SSRN Electronic Journal, 2017

We examine the role of collateral in a dynamic model of optimal credit contracts in which a borrower values both housing and non-housing consumption. The borrower's private information about his income is the only friction. An optimal contract is collateralized when in some state, some portion of the borrower's net worth is forfeited to the lender. We show that optimal contracts are always collateralized. The total value of forfeited assets is decreasing in income, highlighting the role collateral as a deterrent to manipulation. Some assets, those that generate consumable services will necessarily be collateralized while others may not be. Endogenous default arises when the borrower's initial wealth is low, as with subprime borrowers, and/or his future earnings are highly variable.

I present an environment for which both outside and inside money are essential as means of payment. The key model feature is that there is imperfect monitoring of issuers of inside money. I use a random matching model of money where some agents have private trading histories and others have trading histories that can be publicly observed only after a lag. I show via an example that for lags that are neither too long nor too short, there exist allocations that use both types of money that cannot be duplicated when only one type is used.

2016

This paper presents a two-period optimal contracting model of collateral. A borrower values a capital good and a composite non-capital good. He privately observes an income shock in the composite good in the second period. Collateralization of both goods occurs in the optimal contract, whereas it does not under full information. Relative to full information, the capital good in the optimal contract is over-consumed in the initial loan period and under-consumed in the repayment period. The relation between forfeiture of assets and contractual distortion is summarized by a formula showing higher distortions associated with larger increases in forfeited collateral. Forfeiture is decreasing in income at the tails of the income distribution, and low income types forfeit more than high income types. We obtain a closed form solution in a parameterized model. Forfeited collateral is globally decreasing in income with pooling at the bottom when the borrower's initial assets are low.

Handbook of Monetary Economics, 1990

2010

Daniel R Sanches Chapter 1: Money and Credit with Limited Commitment and Theft Credit contracts and fiat money seem to be robust means of payment in the sense that we observe both monetary exchange and credit transactions under a wide array of technologies and monetary policy rules. However, a common result in a large class of models of money and credit is that the optimal monetary policy --usually the Friedman rule --eliminates any transactions role for credit: money drives credit out of the economy. In this sense, money and credit are not robust in the model. We study the interplay among imperfect recordkeeping, limited commitment, and theft, in an environment that can support both monetary exchange and credit arrangements. Imperfect recordkeeping makes outside money socially useful, but it also permits theft of currency to go undetected, and therefore provides lucrative opportunities for thieves in decentralized exchange. First, we show that imperfect recordkeeping and limited commitment are not sufficient to account for the robust coexistence of money and credit.

SSRN Electronic Journal, 2000

We examine the role that credit risk in the central bank's monetary operations plays in the determination of the equilibrium price level and allocations. Our model features trade in fiat money, real assets and a monetary authority which injects money into the economy through short-term and long-term loans to agents. Short-term loans are riskless, but long-term loans are collateralized by a portfolio of real assets and are subject to credit risk. The private monetary wealth of individuals is zero, i.e., there is no outside money. When there is no default in equilibrium, there is indeterminacy. Positive default in every state of the world on some long-term loan endogenously creates positive liquid wealth that supports positive interest rates and resolves the aforementioned indeterminacy. Hence, a non-Ricardian policy across loan markets can determine the equilibrium allocations while it allows the central bank to earn profits from seigniorage in order to compensate for any losses.

2005