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Endogenous credit constraints: the role of informational non-uniqueness

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Abstract

We point out that the equilibrium deinition applied by Miao and Wang [8] in their model of stock price bubbles involves an implicit assumption about the for-mulation of an endogenous credit constraint. By dropping this assumption, one can construct ininitely many additional equilibria for the Miao-Wang economy, all of which exhibit stock price bubbles. The underlying reason for this result is informational non-uniqueness, a phenomenon known from the literature on dynamic games. Neither the original equilibria discussed by Miao and Wang [8] nor the additional ones which exist due to informational non-uniqueness are Markov-perfect. For this reason we propose a recursive equilibrium deinition for the Miao-Wang economy and show how it can be used to construct Markov-perfect equilibria with stock price bubbles.

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  • Gerhard Sorger, 2019. "Endogenous credit constraints: the role of informational non-uniqueness," Vienna Economics Papers vie1903, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie1903
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    1. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(2), pages 285-315.
    2. Gerhard Sorger, 2020. "On the dynamics of stock price bubbles: comments on a model by Miao and Wang," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 28(2), pages 521-537, June.
    3. Sorger,Gerhard, 2015. "Dynamic Economic Analysis," Cambridge Books, Cambridge University Press, number 9781107443792.
    4. Gerhard Sorger, 2020. "On the dynamics of stock price bubbles: comments on a model by Miao and Wang," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 28(2), pages 521-537, June.
    5. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
    6. Carli, Francesco & Modesto, Leonor, 2018. "Endogenous Credit And Investment Cycles With Asset Price Volatility," Macroeconomic Dynamics, Cambridge University Press, vol. 22(7), pages 1859-1874, October.
    7. repec:cup:cbooks:9781107083295 is not listed on IDEAS
    8. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
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    More about this item

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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