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Creditworthiness and thresholds in a credit market model with multiple equilibria

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  • Lars Grüne

    ()

  • Willi Semmler
  • Malte Sieveking

Abstract

The paper studies creditworthiness in a model with endogenous credit cost and debt constraints. Such a model can give rise to multiple candidates for steady state equilibria. We use new analytical techniques such as dynamic programming (DP) with flexible grid size to find solutions and to locate thresholds that separate different domains of attraction. More specifically, we (1) compute present value borrowing constraints and thus creditworthiness, (2) locate thresholds where the dynamics separate to different domains of attraction, (3) show jumps in the decision variable, (4) distinguish between optimal and non-optimal steady states, (5) demonstrate how creditworthiness and thresholds change with change of the credit cost function of the debtor and (6) explore the impact of debt ceilings and consumption paths on creditworthiness. Copyright Springer-Verlag Berlin/Heidelberg 2005

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File URL: http://hdl.handle.net/10.1007/s00199-003-0442-8
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 25 (2005)
Issue (Month): 2 (02)
Pages: 287-315

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Handle: RePEc:spr:joecth:v:25:y:2005:i:2:p:287-315

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Related research

Keywords: Creditworthiness; Default risk; Imperfect capital markets; Multiple equilibria; Asset pricing; Dynamic programming.;

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Cited by:
  1. Alfred Greiner & Uwe Koeller & Willi Semmler, 2006. "Testing the sustainability of German fiscal policy: evidence for the period 1960–2003," Empirica, Springer, vol. 33(2), pages 127-140, June.
  2. Ernst, Ekkehard & Semmler, Willi, 2010. "Global dynamics in a model with search and matching in labor and capital markets," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1651-1679, September.
  3. Willi Semmler & Lucas Bernard, 2011. "Boom-Bust Cycles: Leveraging, Complex Securities, and Asset Prices," DEGIT Conference Papers c016_034, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Alfred Greiner & Uwe Koeller & Willi Semmler, 2005. "Testing Sustainability of German Fiscal Policy. Evidence for the Period 1960 – 2003," CESifo Working Paper Series 1386, CESifo Group Munich.

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