Kiyotaki-Moore model

The Kiyotaki–Moore model of credit cycles is an economic model developed by Nobuhiro Kiyotaki and John H. Moore that shows how small shocks to the economy might be amplified by credit restrictions, giving rise to large output fluctuations. The model assumes that borrowers cannot be forced to repay their debts. Therefore, in equilibrium, lending occurs only if it is collateralized. That is, borrowers must own a sufficient quantity of capital that can be confiscated in case they fail to repay. This collateral requirement amplifies business cycle fluctuations because in a recession, the income from capital falls, causing the price of capital to fall, which makes capital less valuable as collateral, which limits firms' investment by forcing them to reduce their borrowing, and thereby worsens the recession.

Kiyotaki (a macroeconomist) and Moore (a contract theorist) originally described their model in a 1997 paper in the Journal of Political Economy. Their model has become influential because earlier real business cycle models typically relied on large exogenous shocks to account for fluctuations in aggregate output. The Kiyotaki–Moore model shows instead how relatively small shocks might suffice to explain business cycle fluctuations, if credit markets are imperfect.

In their model economy, Kiyotaki and Moore assume two types of decision makers, with different time preference rates: "patient" and "impatient." The "patient" agents are called "gatherers" in the original paper, but should be interpreted as households that wish to save. The "impatient" agents are called "farmers" in the original paper, but should be interpreted as entrepreneurs or firms that wish to borrow in order to finance their investment projects.

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