Nobel Symposium Money and Banking

Transcription

1 Nobel Symposium Money and Banking May -, 0 Clarion Hotel Sign, Stockholm

2 Inside Money and Liquidity Nobuhiro Kiyotaki and John Moore

3 Questions Under what environment does liquidity creation arise? When is the circulation of inside money essential for the smooth running of an economy? How nancial deepening interacts with economic development Approach - Two forms of limited commitment: Bilateral: Debtor may default to original creditor! borrowing constraint Multilateral: Debtor may default to new creditors! limited resaleability

4 Framework A homogeneous, perfectly storable good at each date A continuum of agents (population size ) U t = ln c t + ln c t+ + ln c t+ + ::: Production technology: Invest at date t : G (y) = y! y : Harvest at date t+ where (0; ) : share of human capital Agents are fully engaged during investing, growing, harvesting Can handle only one project at a time Fixed supply of at money

5 The First Best Allocation in Steady State yy = GG yy + cc GG yy = ββ GG(yy) yy GG(yy) yy GG(yy) yy Type I GG(yy) yy GG(yy) yy GG(yy) yy GG(yy) yy GG(yy) yy GG(yy) yy Type II Type III

6 Borrowing constraint: the agent can commit to repay only up to a fraction of output from the present Resaleability constraint: each project comprises large number of parts, and a fraction will fail. After, the original creditor privately learns which parts will fail, and the failing parts can be separated! For a large enough > +, regular (blue) paper cannot be resold before maturity because of "lemons" problem z y fraction of projects can be bundled at additional cost [(-)=] G(z), where 0 < <! special (red) paper backed by the bundled parts can be resold before maturity

7 Bundling "Banking" (Liquidity Creation) q; n : price and quantity of newly issued illiquid blue paper p; m : price and quantity of liquid red paper (inside money) that matures in the next period Investing agent G(y)+ - G(z)+c+pm+qn = p z+q(y z)+m"+n 0 Growing agent Harvesting agent c 0 + pm 0 + qn 0 = m + n" c" + pm" + qn" = ( )y + m 0 + n

8 Goods market y = c + c 0 + c" + G(y) + - G(z) Blue paper market Money market where (y z) = n + n 0 + n" pz + z m + m 0 + m" equality holds and at money has no value if p < at money may have value if p =

9 ϕ: Efficiency of bundling Pattern of Balance Sheet Outside Money Only Specialized Saving Overlapping Saving First Best Allocation 0 θθ< Liquidity Creation > θθ θθ: Fraction of mortgageable output

10 Proposition (Outside Money Only): If [0; ]; then there is no inside money and = p = p q < < q G0 (y) borrowing constraints bind for investing agents and output are lower than the rst best consumption is jagged: highest when harvesting and lowest when growing

11 Saving and Investment with Outside Money Only mm mm mm Type I mm mm mm Type II mm mm Type III

12 Proposition (Liquidity Creation): If (; ); then inside money circulates and p < p q < < q G0 (y) borrowing constraints bind for investing agents and output are lower than the rst best consumption is jagged: highest when harvesting and lowest when investing

13 Liquidity Creation: Specialized Saving Type I Type II Type III

14 Liquidity Creation: Specialized Saving Investing Agents Growing Agents Harvesting Agents Illiquid Paper Inside Money θθzz Investment yy Inside Money θθzz Money Net Worth Investment GG(yy) Illiquid Paper θθ(yy zz) Illiquid Paper θθ(yy zz) Illiquid Paper Net Worth Net Worth

15 Liquidity Creation: Overlapping Saving Type I Type II Type III

16 Liquidity Creation: Overlapping Saving Investing Agents Growing Agents Harvesting Agents Illiquid Paper Inside Money θθzz Illiquid Paper Inside Money θθzz Money Net Worth Investment GG(yy) Illiquid Paper θθ(yy zz) Net Worth Investment yy Illiquid Paper θθ(yy zz) Net Worth Illiquid Paper nn,

17 Proposition (First Best Allocation): If [ ; ]; then no money circulates and p = p q = = q G0 (y) borrowing constraints do not bind for investing agents and output are at the rst best consumption is smooth

18 First Best Allocation

19 ϕ: Efficiency of bundling Media of Exchange Outside Money Only Inside Money Only Inside and Outside Money No Money 0 θθ < Liquidity Creation > θθ θθ: Fraction of mortgageable output