Saturday, November 20, 2010

More on Leverage, Debt Constraints, and Asset Prices

Given some of the issues raised in the Eggertsson-Krugman paper, a useful reference point is the paper Kocherlakota gave at the Jekyll Island conference. Kocherlakota's paper gives us some detail on the fundamental determinants of debt constraints and how they relate to the financial crisis. Check out his reference list, which is particularly useful.


  1. I got my bachelors of econ degree in 1981 but for the life of me I do not get why Kocherlakota says "the real interest rate equalizes the demand for savings by lenders with the supply of saving by borrowers." I thought lenders were households that were supplying saving and borrowers were deficit units demanding saving?
    Is there something perhaps to do with income/substitution effects that I am missing?

  2. Yes, that's a typo. He means the supply of savings by lenders and the demand for savings by borrowers.

  3. Rediscovering Georgism....

  4. Well, given the maturity transformation process (and an interbank money market + central bank), borrowing doesn't have to equal savings.

    In a simplistic money multiplier process, outside reserve growth and debt repayment determine interest rates, not savings.

    If borrowing is more then savings, either goods (and savings) will be sucked in from abroad or inflation will result.