Prices and Investment with Collateral and Default

43 Pages Posted: 11 Jan 2015

See all articles by Michael J. P. Magill

Michael J. P. Magill

University of Southern California - Department of Economics

Martine Quinzii

University of California, Davis - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 19, 2014

Abstract

This paper uses the framework of an OLG economy with three-period lived agents in which a durable good serves as collateral for loans, to study the effect of an unanticipated income shock when the economy is in a steady state equilibrium. We focus on the consequence of default on loans when the value of the collateral falls below the value of the debt it secures. We analyze the impulse response functions of the price and production of the durable good and show that there is an asymmetry between the response of the price and investment of the durable good to a positive and a negative income shock arising from default on the collateralized loans.

Keywords: Overlapping generations, durable good, collateral, default, Golden Rule steady state, asymmetric impulse response functions

JEL Classification: D51, D91

Suggested Citation

Magill, Michael J. P. and Quinzii, Martine, Prices and Investment with Collateral and Default (September 19, 2014). USC-INET Research Paper No. 15-01. Available at SSRN: https://ssrn.com/abstract=2546102 or http://dx.doi.org/10.2139/ssrn.2546102

Michael J. P. Magill (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-2104 (Phone)
213-740-8543 (Fax)

Martine Quinzii

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-1567 (Phone)
530-752-9382 (Fax)

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