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Learning in a credit economy

  • Assenza, Tiziana
  • Berardi, Michele

In this paper we analyze a credit economy à la Kiyotaki and Moore [1997. Credit cycles. Journal of Political Economy 105, 211-248] enriched with learning dynamics, where both borrowers and lenders need to form expectations about the future price of the collateral. We find that under homogeneous learning, the MSV REE for this economy is E-stable and can be learned by agents, but when heterogeneous learning is allowed and uncertainty in terms of a stochastic productivity is added, expectations of lenders and borrowers can diverge and lead to bankruptcy (default) on the part of the borrowers.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165-1889(09)00035-9
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 5 (May)
Pages: 1159-1169

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:5:p:1159-1169
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  2. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  3. George W. Evans & Seppo Honkapohja, 2002. "Monetary Policy, Expectations and Commitment," University of Oregon Economics Department Working Papers 2005-11, University of Oregon Economics Department, revised 06 Apr 2005.
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  8. Branch, William A. & McGough, Bruce, 2009. "A New Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1036-1051, May.
  9. Branch, William A. & Evans, George W., 2006. "Intrinsic heterogeneity in expectation formation," Journal of Economic Theory, Elsevier, vol. 127(1), pages 264-295, March.
  10. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
  11. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
  12. Evans, George W. & Honkapohja, Seppo, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," CEPR Discussion Papers 2805, C.E.P.R. Discussion Papers.
  13. Stiglitz,Joseph & Greenwald,Bruce, 2003. "Towards a New Paradigm in Monetary Economics," Cambridge Books, Cambridge University Press, number 9780521810340, November.
  14. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
  15. Honkapohja, Seppo & Mitra, Kaushik, 2002. "Learning stability in economics with heterogeneous agents," Working Paper Series 0120, European Central Bank.
  16. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  17. LeBaron, Blake, 2006. "Agent-based Computational Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 24, pages 1187-1233 Elsevier.
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