Endogenous Credit Cycles
AbstractWe 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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Bibliographic InfoPaper provided by Department of Economics, University of Missouri in its series Working Papers with number 1011.
Length: 37 pgs.
Date of creation: 11 Oct 2010
Date of revision:
sunspot credit; commitment; dynamics; cycles.;
Other versions of this item:
- Chao Gu & Randall Wright, 2011. "Endogenous credit cycles," Working Papers 689, Federal Reserve Bank of Minneapolis.
- Chao Gu & Randall Wright, 2011. "Endogenous Credit Cycles," NBER Working Papers 17510, National Bureau of Economic Research, Inc.
- Randall Wright & Chao Gu, 2011. "Endogenous Credit Cycles," 2011 Meeting Papers 373, Society for Economic Dynamics.
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-23 (All new papers)
- NEP-BAN-2010-10-23 (Banking)
- NEP-DGE-2010-10-23 (Dynamic General Equilibrium)
- NEP-MAC-2010-10-23 (Macroeconomics)
- NEP-MIC-2010-10-23 (Microeconomics)
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