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Indeterminacy in credit economies

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  • Bethune, Zachary
  • Hu, Tai-Wei
  • Rocheteau, Guillaume

Abstract

We characterize the equilibrium set of a two-good, pure-credit economy with limited commitment, under both pairwise and centralized meetings. We show that the set of equilibria derived under “not-too-tight” solvency constraints (Alvarez and Jermann, 2000) commonly used in the literature is of measure zero in the whole set of Perfect Bayesian Equilibria. There exist a continuum of stationary equilibria, a continuum of endogenous credit cycles of any periodicity, and a continuum of sunspot equilibria, irrespective of the assumed trading mechanism. Equilibria featuring “too-tight” solvency constraints can generate growing credit limits over time, periodic credit shutdowns, and heterogeneous debt limits across ex-ante identical borrowers. Moreover, we provide examples of credit cycles that dominate, from a social welfare point of view, all equilibria with “not-too-tight” solvency constraints.

Suggested Citation

  • Bethune, Zachary & Hu, Tai-Wei & Rocheteau, Guillaume, 2018. "Indeterminacy in credit economies," Journal of Economic Theory, Elsevier, vol. 175(C), pages 556-584.
    • Handle: RePEc:eee:jetheo:v:175:y:2018:i:c:p:556-584
    DOI: 10.1016/j.jet.2018.01.020
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    References listed on IDEAS

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    Cited by:

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    2. Gu, Chao, 2023. "Endogenous cycles in a competitive search credit market," Economics Letters, Elsevier, vol. 229(C).
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    4. Araujo, Luis & Hu, Tai-Wei, 2018. "Optimal monetary interventions in credit markets," Journal of Economic Theory, Elsevier, vol. 178(C), pages 455-487.
    5. Kang, Kee-Youn & Jang, Inkee, 2020. "Dynamic Adverse Selection and Belief Update in Credit Markets," MPRA Paper 99071, University Library of Munich, Germany.
    6. Kee-Youn Kang, 2023. "Cryptocurrency and double spending history: transactions with zero confirmation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(2), pages 453-491, February.
    7. Cui, Wei & Kaas, Leo, 2021. "Default cycles," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 377-394.
    8. Rocheteau, Guillaume & Wang, Lu, 2023. "Endogenous liquidity and volatility," Journal of Economic Theory, Elsevier, vol. 210(C).
    9. Gu, Chao & Monnet, Cyril & Nosal, Ed & Wright, Randall, 2023. "Diamond–Dybvig and beyond: On the instability of banking," European Economic Review, Elsevier, vol. 154(C).

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    More about this item

    Keywords

    Credit cycles; Limited commitment; Money;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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