MACROECONOMIC IMPLICATIONS OF
FINANCIAL CONSTRAINTS
2. Dual role of physical assets as input and collateral.
3. LAPM.
10th set of transparencies for ToCF
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)
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MODEL
Preferences: All agents have linear preferences:
Two goods :
 Non durable ( endowment each period)
 Durable: real estate A units
Can be used as
Commercial
Residential
Only store of value
Two classes of agents
 Entrepreneurs:
 Investors:
no endowment must borrow entire investment (non durable
good); but can hold real estate from last period (actually hold entire
real estate in equilibrium).
receive endowment at beginning of
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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
consumption of residential real estate
date t

Contract
• Rb in case of success + assets a to borrower
• lenders receive
a in case of failure
if success
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End-of-period market for real estate
 investors sell assets they have seized
 successful entrepreneurs buy more
 Equilibrium
No aggregate uncertainty
deterministic path
 Continuation valuation of an entrepreneur starting with a at the beginning of date t :
arbitrage
 Debt capacity:
and
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where

Note:
(net suppliers)
 Real estate market
or
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MACROECONOMIC IMPLICATIONS OF FINANCIAL
CONSTRAINTS
3. LAPM : Liquidity Premia and Asset Pricing
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