Monetary Policy and Interest Rates with Collateralized Borrowing ∗

Secured debt has become a predominant form of credit. The purpose of this paper is to analyze collateral in a model of money and its interaction with monetary policy and interest rates. Borrowing capacity, and ultimately consumption, is linked to the value of the asset that serves as collateral, which is specific to each agent. This asset is different from fiat money and a standard financial asset and is still valued for its liquidity as a collateralizable asset in contingencies. Thus, the valuation of the asset will not follow conventional considerations. The Friedman rule is still optimal. Nominal interest rate targeting captures one of the driving forces in the model: the impact of borrowing constraints on real loan demand. Numerical simulations confirm both that the Mudell-Tobin effect is not present in this model, and that changes in the interest rates have a smaller impact in homogeneous economies populated by constrained agents than in economies with both types