Collateral secured loans in a monetary economy

This paper presents a microfounded model of money where durable assets serve as a guarantee to repay consumption loans. We establish steady state equilibria where money and bank credit coexist. In such an equilibrium, a larger investment in durable capital relaxes the borrowing constraint faced by consumers and thus provides a way to mitigate their costs of money holdings. We show that the occurrence of over-investment and the behavior of capital accumulation depend on the rate of inflation, relative risk aversion of agents and the marginal productivity of the capital goods.