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Endogenous Credit Cycles

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Abstract

We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.

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File URL: http://economics.missouri.edu/working-papers/2010/wp1011_gu.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 1011.

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Length: 37 pgs.
Date of creation: 11 Oct 2010
Date of revision:
Handle: RePEc:umc:wpaper:1011

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Keywords: sunspot credit; commitment; dynamics; cycles.;

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  1. Costas Azariadis & Leo Kaas, 2012. "Endogenous Credit Limits with Small Default Costs," Working Paper Series of the Department of Economics, University of Konstanz 2012-17, Department of Economics, University of Konstanz.
  2. Christian Hellwig & Guido Lorenzoni, 2006. "Bubbles and Self-enforcing Debt," Levine's Bibliography 321307000000000383, UCLA Department of Economics.
  3. Azariadis, Costas & Kaas, Leo, 2007. "Asset price fluctuations without aggregate shocks," Journal of Economic Theory, Elsevier, vol. 136(1), pages 126-143, September.
  4. Aliprantis, C.D. & Camera, Gabriele & Puzzello, D., 2005. "Anonymous Markets and Monetary Trading," Purdue University Economics Working Papers 1179, Purdue University, Department of Economics.
  5. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
  6. Carol C. Bertaut & Michael Haliassos, 2001. "Debt Revolvers for Self Control," University of Cyprus Working Papers in Economics 0208, University of Cyprus Department of Economics.
  7. Randall Wright & Cyril Monnet & Fabrizio Mattesini, 2009. "Banking: a mechanism design approach," 2009 Meeting Papers 635, Society for Economic Dynamics.
  8. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
  9. Roger E. A. Farmer, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 357-358, 09.
  10. Boragan Aruoba, S. & Rocheteau, Guillaume & Waller, Christopher, 2007. "Bargaining and the value of money," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2636-2655, November.
  11. David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," NBER Working Papers 7879, National Bureau of Economic Research, Inc.
  12. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
  13. Marcellus Andrews, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, by George A. Akerlof and Robert J. Shiller," Challenge, M.E. Sharpe, Inc., vol. 52(5), pages 126-131, September.
  14. Cynthia Harter, 2009. "Review of "Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism"," International Review of Economic Education, Economics Network, University of Bristol, vol. 8(1), pages 155-157.
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Cited by:
  1. Jianjun Miao & PENGFEI WANG & Lifang Xu, 2012. "Stock Market Bubbles and Unemployment," Boston University - Department of Economics - Working Papers Series WP2012-011, Boston University - Department of Economics.

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