Collateralized assets prices and monetary policy

Abstract

A well-informed and cautious financial system can improve the welfare outcome of an economy by making lenders surplus to borrowers. Nevertheless, in a crisis, the behavior of the financial system can become an amplifier of it, given that credit approval conditions rarely meet the standards. Therefore, a credit crunch may occur even in a low-interest rates environment. This paper illustrates the aforementioned point by developing a general equilibrium model where the collateral credit condition defines the prudential behavior of the financial system. It and other conditions amplify the magnitude of a negative productivity shock.