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On borrowing limits and welfare

Author

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  • Francesc Obiols-Homs

    (Universitat Autonoma de Barcelona)

Abstract

We study the effect of borrowing limits on welfare in several versions of exchange and production economies. There is a "quantity" effect of a larger borrowing limit which is beneficial for liquidity constrained agents, but essentially irrelevant otherwise. There is also a ``price effect" which tends to increase the interest rate so that lenders are better off and borrowers are worse off. The combination of these effects produces that aggregate welfare in equilibrium (or ex ante welfare) displays an inverted U-shape as a function of the borrowing limit. In infinite horizon economies with incomplete markets we find a sizable "middle class" of not liquidity constrained but indebted agents that observes small gains, or even loses, after the borrowing limit is enlarged. (Copyright: Elsevier)

Suggested Citation

  • Francesc Obiols-Homs, 2011. "On borrowing limits and welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 279-294, April.
    • Handle: RePEc:red:issued:08-181
    DOI: 10.1016/j.red.2009.10.011
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    3. Ngoc-Sang Pham, 2023. "Some Lectures on Macroeconomics," Working Papers hal-04366349, HAL.
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    6. Alvarez-Cuadrado, Francisco & Japaridze, Irakli, 2017. "Trickle-down consumption, financial deregulation, inequality, and indebtedness," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 1-26.
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    8. Makoto Nakajima, 2012. "Rising indebtedness and temptation: A welfare analysis," Quantitative Economics, Econometric Society, vol. 3(2), pages 257-288, July.
    9. Ngoc-Sang Pham, 2022. "Impacts of (individual and aggregate) productivity and credit shocks on equilibrium aggregate production," Working Papers halshs-03686284, HAL.
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    More about this item

    Keywords

    Borrowing constraints; Incomplete markets; Welfare;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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