Kiyotaki-Moore model

The Kiyotaki-Moore model of credit cycles is an economic model developed by Nobuhiro Kiyotaki and John Moore that shows how small shocks to the economy might be amplified into large output fluctuations by credit restrictions.

The model has made Business cycle models (which typically rely on large exogenous shocks to account for fluctuations in aggregate output) vulnerable to criticism because shocks of the required magnitude are difficult to find in the data. The Kiyotaki-Moore model of credit cycles shows how small shocks might be amplified into large cyclical movements by credit constraints.

More specifically, in the model of Kiyotaki and Moore (1997), two types of households (and firms) with different time preference rates are assumed: "patient" and "impatient." As the impatient households are not satisfied with the market interest rates, they consume faster than the patient households. Therefore, they cannot save internal funds and borrow as much as possible to smooth consumption. When borrowing money, there are constraints for households to provide real estate as collateral. The paper also analyzes cases where debt contracts are set only in nominal terms or where contracts can be set in real terms, and considers the differences between the cases.

In this model economy, in the presence of credit contracts with limited enforcement, land plays two distinct roles: (i) the role of collateral for debt and (ii) the role of a productive input. In such an economy, the level of credit limit to each firm positively depends upon the value of land, while the demand for land is increasing in credit provided to each firm.

References

Nobuhiro Kiyotaki and John Moore (1997) "Credit Cycles," "Journal of Political Economy", 105, 211-248.