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Credit Markets, Limited Commitment, and Government Debt

Author

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  • Francesca Carapella
  • Stephen Williamson

Abstract

A dynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers' incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not.

Suggested Citation

  • Francesca Carapella & Stephen Williamson, 2015. "Credit Markets, Limited Commitment, and Government Debt," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(3), pages 963-990.
    • Handle: RePEc:oup:restud:v:82:y:2015:i:3:p:963-990.
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    File URL: http://hdl.handle.net/10.1093/restud/rdv006
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    Cited by:

    1. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 74010, University Library of Munich, Germany.
    2. Wang, Zijian, 2020. "Liquidity and private information in asset markets: To signal or not to signal," Journal of Economic Theory, Elsevier, vol. 190(C).
    3. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 73707, University Library of Munich, Germany.
    4. Chao Gu & Fabrizio Mattesini & Randall Wright, 2016. "Money and Credit Redux," Econometrica, Econometric Society, vol. 84, pages 1-32, January.
    5. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 73533, University Library of Munich, Germany.
    6. Ohik Kwon & Manjong Lee, 2024. "Credit Market Frictions and Coessentiality of Money and Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(1), pages 257-278, February.
    7. Pierre Yared & Marina Azzimonti, 2017. "The Public and Private Provision of Safe Assets," 2017 Meeting Papers 755, Society for Economic Dynamics.
    8. Carli, Francesco & Gomis-Porqueras, Pedro, 2021. "Real consequences of open market operations: The role of limited commitment," European Economic Review, Elsevier, vol. 132(C).
    9. Kiyotaki, Nobuhiro & Lagos, Ricardo & Wright, Randall, 2016. "Introduction to the symposium issue on money and liquidity," Journal of Economic Theory, Elsevier, vol. 164(C), pages 1-9.
    10. Fabienne Schneider & Remo Taudien, 2024. "Credit and Anonymity," Working Papers 24.04, Swiss National Bank, Study Center Gerzensee.
    11. Bethune, Zachary & Hu, Tai-Wei & Rocheteau, Guillaume, 2018. "Indeterminacy in credit economies," Journal of Economic Theory, Elsevier, vol. 175(C), pages 556-584.
    12. Azzimonti, Marina & Yared, Pierre, 2019. "The optimal public and private provision of safe assets," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 126-144.
    13. Francesca Carapella, 2017. "Credit markets, Limited commitment and Optimal monetary policy," 2017 Meeting Papers 1523, Society for Economic Dynamics.
    14. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 74615, University Library of Munich, Germany.
    15. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 75869, University Library of Munich, Germany.
    16. Athanasios Geromichalos & Jiwon Lee & Seungduck Lee & Keita Oikawa, 2016. "Over-the-counter trade and the value of assets as collateral," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 443-475, August.
    17. Kee-Youn Kang, 2023. "Cryptocurrency and double spending history: transactions with zero confirmation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(2), pages 453-491, February.
    18. Eryzhenskiy, Ilya, 2025. "Intergenerational redistribution with endogenous constraints to household debt," Journal of Mathematical Economics, Elsevier, vol. 116(C).
    19. Chao He & Randall Wright & Yu Zhu, 2015. "Housing and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 435-455, July.

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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