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On borrowing limits and welfare

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  • Francesc Obiols-Homs

    (Universitat Autonoma de Barcelona)

Abstract

We study the effect of borrowing limits on welfare in several versions of exchange and production economies. There is a "quantity" effect of a larger borrowing limit which is beneficial for liquidity constrained agents, but essentially irrelevant otherwise. There is also a ``price effect" which tends to increase the interest rate so that lenders are better off and borrowers are worse off. The combination of these effects produces that aggregate welfare in equilibrium (or ex ante welfare) displays an inverted U-shape as a function of the borrowing limit. In infinite horizon economies with incomplete markets we find a sizable "middle class" of not liquidity constrained but indebted agents that observes small gains, or even loses, after the borrowing limit is enlarged. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 14 (2011)
Issue (Month): 2 (April)
Pages: 279-294

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Handle: RePEc:red:issued:08-181

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Keywords: Borrowing constraints; Incomplete markets; Welfare;

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  1. Michael Haliassos & Christis Hassapis, 1998. "Borrowing Constraints, Portfolio Choice, and Precautionary," Macroeconomics, EconWPA 9809008, EconWPA.
  2. DAVILA, Julio & HONG, Jay H. & KRUSELL, Per & RIOS-RULL, José-Victor, . "Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2463, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2002. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP), Centro de Altisimos Estudios Rios Perez (CAERP) 2, Centro de Altisimos Estudios Rios Perez (CAERP).
  4. repec:hal:journl:halshs-00196183 is not listed on IDEAS
  5. Paxson, Christina, 1990. "Borrowing Constraints and Portfolio Choice," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(2), pages 535-43, May.
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Cited by:
  1. Kartik B. Athreya & Xuan S. Tam & Eric R. Young, 2012. "Debt default and the insurance of labor income risks," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue 4Q, pages 255-307.
  2. Marian Leimbach & Baumstark, Lavinia, 2011. "Intertemporal trade and the Integrated Assessment of climate change mitigation policies," EcoMod2011, EcoMod 3036, EcoMod.
  3. Makoto Nakajima, 2011. "Rising indebtedness and temptation: a welfare analysis," Working Papers 11-39, Federal Reserve Bank of Philadelphia.

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