MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS 2. Dual role of physical assets as input and collateral. 3. LAPM. 10th set of transparencies for ToCF

2 KIYOTAKI - MOORE JPE 1997 Basic idea: one store of value, that is also an input into production process. "Commercial real estate", price p  at date  possibility of multiple equilibria (and cycles)

3 MODEL Preferences: All agents have linear preferences: Can be used as CommercialResidential Only store of value Two classes of agents receive endowment at beginning of Investors: Two goods : Non durable ( endowment each period) Durable: real estate A units Entrepreneurs: no endowment must borrow entire investment (non durable good); but can hold real estate from last period (actually hold entire real estate in equilibrium).

4 Production technology Entrepreneur starting at t with a units of real estate. Invests / borrows i of date-t good. Requires of commercial real estate. rented as residential real estate at rental rate income demand for residential real estate date t consumption of residential real estate Contract R b in case of success + assets a to borrower lenders receive a in case of failure if success

5 No aggregate uncertainty deterministic path End-of-period market for real estate -investors sell assets they have seized -successful entrepreneurs buy more Continuation valuation of an entrepreneur starting with a at the beginning of date t : arbitrage and  Equilibrium Debt capacity:

6 where or Real estate market Note: (net suppliers)

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8 MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS 3. LAPM : Liquidity Premia and Asset Pricing

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