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Sunspots and Credit Frictions

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  • Sharon G. Harrison

    ()
    (Department of Economics, Barnard College, Columbia University)

  • Mark Weder

    ()
    (School of Economics, University of Adelaide)

Abstract

We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumer's choice of leisure. Unlike this model without a collateral constraint, we find that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulfilling expectations. This is the case for more realistic parametrizations than in previous, similar models without these features.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2010-02.pdf
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Bibliographic Info

Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2010-02.

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Length: 21 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:adl:wpaper:2010-02

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Related research

Keywords: business cycles; credit markets; collateral constraint; sunspots;

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  1. Sunspots and Credit Frictions
    by Christian Zimmermann in NEP-DGE blog on 2010-01-25 03:20:38
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Cited by:
  1. Costas Azariadis & Leo Kaas, 2012. "Self-Fulfilling Credit Cycles," Working Paper Series of the Department of Economics, University of Konstanz 2012-16, Department of Economics, University of Konstanz.
  2. Nutahara, Kengo, 2010. "Asset prices and monetary policy in a sticky-price economy with financial frictions," MPRA Paper 24113, University Library of Munich, Germany.

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