The seminal contribution by Kiyotaki and Moore (1997) has spurred a vast literature on the importance of collateral constraints in propagating and amplifying shocks to the economy. However, most papers in the literature using collateral constraints assume non-state-contingent debt, i.e., markets are incomplete. To assess the relative importance of collateral constraints versus market incompleteness, we study a calibrated incomplete markets model and solve it with and without collateral constraints. We find that market incompleteness by itself plays a quantitatively significant role in the amplified and asymmetric responses of the economy, including land price and output, to exogenous shocks.
Cao, Dan, and Guangyu Nie.
"Amplification and Asymmetric Effects without Collateral Constraints."
American Economic Journal: Macroeconomics,
Business Fluctuations; Cycles
Financial Markets and the Macroeconomy
One, Two, and Multisector Growth Models