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On Overborrowing

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  • Martín Uribe

Abstract

This paper characterizes the equilibrium dynamics in an economy facing an aggregate debt ceiling. This borrowing limit is intended to capture an environment in which foreign investors base their lending decisions predominantly upon macro indicators. Individual agents do not internalize the borrowing constraint. Instead, a country interest-rate premium emerges to clear the financial market. The implied equilibrium dynamics are compared to those arising from a model in which the debt ceiling is imposed at the level of each individual agent. The central finding of the paper is that the economy with the aggregate borrowing limit does not generate higher levels of debt than the economy with the individual borrowing limit. That is, there is no overborrowing in equilibrium.
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Suggested Citation

  • Martín Uribe, 2006. "On Overborrowing," American Economic Review, American Economic Association, vol. 96(2), pages 417-421, May.
    • Handle: RePEc:aea:aecrev:v:96:y:2006:i:2:p:417-421
    DOI: 10.1257/000282806777211829
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    Cited by:

    1. Uribe, Martín & Schmitt-Grohé, Stephanie, 2012. "Prudential Policy for Peggers," CEPR Discussion Papers 8961, C.E.P.R. Discussion Papers.
    2. Kitano, Shigeto, 2011. "Capital controls and welfare," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 700-710.
    3. Kim, Yun Jung & Zhang, Jing, 2012. "Decentralized borrowing and centralized default," Journal of International Economics, Elsevier, vol. 88(1), pages 121-133.
    4. Mendicino, Caterina, 2012. "On the amplification role of collateral constraints," Economics Letters, Elsevier, vol. 117(2), pages 429-435.
    5. Zhao, Yan, 2013. "Borrowing constraints and the trade balance–output comovement," Economic Modelling, Elsevier, vol. 32(C), pages 34-41.
    6. Faia, Ester & Iliopulos, Eleni, 2011. "Financial openness, financial frictions and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1976-1996.

    More about this item

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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