Kiyotaki–Moore model
The Kiyotaki–Moore model of credit cycles is an
Kiyotaki (a
. The Kiyotaki–Moore model shows instead how relatively small shocks might suffice to explain business cycle fluctuations, if credit markets are imperfect.Structure of the model
In their model economy, Kiyotaki and Moore assume two types of
Two key assumptions limit the effectiveness of the credit market in the model. First, the knowledge of the "farmers" is an essential input to their own investment projects—that is, a project becomes worthless if the farmer who made the investment chooses to abandon it. Second, farmers cannot be forced to work, and therefore they cannot sell off their future labor to guarantee their debts. Together, these assumptions imply that even though farmers' investment projects are potentially very valuable, lenders have no way to confiscate this value if farmers choose not to pay back their debts.
Therefore, loans will only be made if they are backed by some other form of capital which can be confiscated in case of default. In other words, loans must be backed by collateral. Kiyotaki and Moore's paper considers land as an example of a collateralizable asset. Thus land plays two distinct roles in the model: (i) it is a productive input, and (ii) it also serves as collateral for debt.
Hence, impatient agents must provide real estate as collateral if they wish to borrow. If for any reason the value of real estate declines, so does the amount of debt they can acquire. This feeds back into the real estate market, driving the price of land down further (thus, the borrowing decisions of the impatient agents are strategic complements). This positive feedback is what amplifies economic fluctuations in the model.
The paper also analyzes cases where debt contracts are set only in nominal terms or where contracts can be set in real terms, and considers the differences between the cases.
Extensions
The original paper of Kiyotaki and Moore was theoretical in nature, and made little attempt to evaluate the quantitative relevance of their mechanism for actual economies. In 2005, Kiyotaki's student
References
- S2CID 16128907.
- .