Endogenous Credit Cycles
This paper studies models of credit with limited commitment and, therefore, endogenous debt limits. There are multiple stationary equilibria plus nonstationary equilibria in which credit conditions change simply because of beliefs. There can be equilibria in which debt limits display deterministic cyclic or chaotic dynamics, as well as stochastic (sunspot) equilibria in which they fluctuate randomly, even though fundamentals are deterministic and time invariant. Examples and applications are discussed. We also consider different mechanisms for determining the terms of trade and compare the setup to other credit models in the literature.
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