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Financial constraints, endogenous markups, and self-fulfilling equilibria

  • Benhabib, Jess
  • Wang, Pengfei

Self-fulfilling equilibria and indeterminacy can easily arise in a simple financial accelerator model with reasonable parameter calibrations and without increasing returns in production. A key feature for generating indeterminacy in our model is the countercyclical markup due to the procyclical loan-to-output ratio. We illustrate, via simulations, that our financial accelerator model can generate rich business cycle dynamics, including hump-shaped output in response to demand shocks as well as autocorrelation in output growth rates.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 7 ()
Pages: 789-805

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Handle: RePEc:eee:moneco:v:60:y:2013:i:7:p:789-805
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