A Financial Crisis in a Monetary Economy

By Keiichiro Kobayashi

http://d.repec.org/n?u=RePEc:eti:dpaper:11009&r=dge

We generalize Lagos and Wright’s (2005) framework for a monetary economy in a way that there exist two technologies, “high” and “low,” for producing the goods in a decentralized matching market. The high technology is more productive than the low technology, while the agents who use the high technology cannot commit in advance to deliver the goods. The lack of commitment makes it infeasible to produce the goods with the high technology if trade is conducted via a simple cash payment. To use the high technology, private valuable assets, e.g., residential property, should be put up as a “hostage” Ă  la Williamson (1983) in the transaction. In this setting, a deterioration in the balance sheet due to a financial crisis leads to the disappearance of residential assets which are not yet put up as collateral, and hinder the usage of the high technology, leading to a decline in aggregate productivity. In this case, monetary injections cannot restore productivity after a financial crisis.

I believe this is the first money search model that can address a financial crisis of the type we have recently experienced, correct me if I am wrong.

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One Response to A Financial Crisis in a Monetary Economy

  1. Keiichiro Kobayashi says:

    I am not quite confident and so I stopped thinking about the idea in this working paper for a year or more. But if it can be some contribution to the literature, I would like to develop it further. Anyway thank you for posting this paper.

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