By Kalin Nikolov
In this paper, we build a Kiyotaki-Moore style collateral amplification framework which generates large endogenous fluctuations in the leverage available to investing firms. We assume that defaulting borrowers lose not only their tangible collateral but also their future debt market access. The possibility of such market exclusion can lead to the emergence of intangible collateral in equilibrium alongside the tangible collateral which is usually studied in the literature. Fluctuations in the value of intangible collateral are isomorphic to fluctuations in the downpayments they need to make in their purchases of productive assets. This modification of the Kiyotaki-Moore model substantially increases its amplification of exogenous shocks.
What this paper is getting at is that “goodwill,” “credibility,” or “reputation” are forms of valuable intangible capital that are quickly lost, and hence provide an interesting amplication mechanism for economic fluctuations. As far as I can see it, though, it misses an important asymmetry as modeled in this paper: this intangible asset is quickly lost but it takes a long time to reestablish it. That would be coherent with the asymmetries of output fluctuations.
PS: Due to the very large number of papers disseminated through NEP-DGE this week, I have selected more than one paper. One was presented yesterday, and a third one will appear here tomorrow.