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Default and Credit Constraint in General equilibrium

Author

Listed:
  • Xavier Ragot

    (Paris School of Economics and Banque de France)

  • François Le Grand

    (EM Lyon)

Abstract

We study an economy where infinitely living agents face uninsurable shocks and are allowed default on their debt. After having defaulted, agents are excluded from the economy. We present a equilibrium definition allowing for both credit constraints and default inequilibrium. Indeed, existing theories introduce either default of credit constraint in general equilibrium, but never both. We prove that the optimal allocation includes both credit constraints and default, while the market allocation is associated with too much credit and too many default in equilibrium.

Suggested Citation

  • Xavier Ragot & François Le Grand, 2011. "Default and Credit Constraint in General equilibrium," 2011 Meeting Papers 1165, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:1165
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    References listed on IDEAS

    as
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