Collateral constraints and macroeconomic volatility
AbstractWe show how realistic occasionally binding collateral constraints increase macroeconomic volatility. Collateral constraints imply that the effect of consumers' choices on the price of collateral feeds back into the set of feasible choices, thus giving rise to multiple equilibria. We characterize how the possibility of multiple equilibria depends on aggregate wealth. We find that for low levels of wealth the economy is vulnerable to changes of consumer confidence (sunspots) which increase the volatility of prices and consumption.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 390.
Date of creation: 2012
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