Credit markets, limited commitment, and government debt
AbstractA dynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers’ incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not.
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Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2014-10.
Length: 41 pages
Date of creation: 24 Feb 2014
Date of revision:
Other versions of this item:
- Stephen Williamson & Francesca Carapella, 2012. "Credit Markets, Limited Commitment, and Government Debt," 2012 Meeting Papers 226, Society for Economic Dynamics.
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-05 (All new papers)
- NEP-BAN-2014-04-05 (Banking)
- NEP-CTA-2014-04-05 (Contract Theory & Applications)
- NEP-DGE-2014-04-05 (Dynamic General Equilibrium)
- NEP-MAC-2014-04-05 (Macroeconomics)
- NEP-PBE-2014-04-05 (Public Economics)
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