Collateral Secured Loans in a Monetary Economy∗
Leo Ferraris†
Makoto Watanabe‡
Universidad Carlos III de Madrid
Universidad Carlos III de Madrid
June 15, 2007
Abstract
This paper presents a microfounded model of money where durable assets serve as a
guarantee to repay consumption loans. We establish steady state equilibria where money
and bank credit coexist. In such an equilibrium, a larger investment in durable capital
relaxes the borrowing constraint faced by consumers and thus provides a way to mitigate
their costs of money holdings. We show that the occurrence of over-investment and the
behavior of capital accumulation depend on the rate of inflation, relative risk aversion of
agents and the marginal productivity of the capital goods.
Keywords: Collateral, Money, Search
JEL: E40
∗We are grateful to Boragan Aruoba, Aleksander Berentsen, Ken Burdett, Gabriele Camera, Melvyn Coles,
Miquel Faig, Nobuhiro Kiyotaki, Ricardo Lagos, Alberto Trejos, Neil Wallace, Christopher Waller, Randall
Wright and participants at the Optimal Monetary Policy Conference in Ascona and SED 2007 annual meeting
in Prague for useful comments and discussion throughout the course of this project. Financial support from
the Spanish government in the form of research grant, SEJ 2006-11665-C02, and research fellowship, Juan de
la Cierva, is gratefully acknowledged.
†Corresponding author. Department of Economics, Universidad Carlos III de Madrid, Calle Madrid 126,
28903 Getafe Madrid, SPAIN. Email: lferrari@eco.uc3m.es, Tel.: +34-91-624-9619, Fax: +34-91624-9329.
‡Department of Economics, Universidad Carlos III de Madrid, Calle Madrid 126, 28903 Getafe Madrid,
SPAIN. Email: mwatanab@eco.uc3m.es, Tel.: +34-91624-9331, Fax: +34-91624-9329.
1
1 Introduction
Frictions are a necessary ingredient for money to emerge as a medium of exchange. Anonymity
is essential. In a recent study, Berentsen, Camera and Waller (2006) establish a framework in
which agents’ anonymity is preserved on the goods market but not on the credit market, and
bank credit play