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Endogenous Credit Cycles

  • Chao Gu
  • Fabrizio Mattesini
  • Cyril Monnet
  • Randall Wright

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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File URL: http://www.jstor.org/stable/pdfplus/10.1086/673472
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File URL: http://www.jstor.org/stable/full/10.1086/673472
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 121 (2013)
Issue (Month): 5 ()
Pages: 940 - 965

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Handle: RePEc:ucp:jpolec:doi:10.1086/673472
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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  1. Christian Hellwig & Guido Lorenzoni, 2006. "Bubbles and Self-Enforcing Debt," NBER Working Papers 12614, National Bureau of Economic Research, Inc.
  2. Costas Azariadis & Leo Kaas, 2012. "Endogenous credit limits with small default costs," Working Papers 2012-048, Federal Reserve Bank of St. Louis.
  3. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Fabrizio Mattesini & Cyril Monnet & Randall Wright, 2009. "Banking: a mechanism design approach," Working Papers 09-26, Federal Reserve Bank of Philadelphia.
  5. Roger E. A. Farmer, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 357-358, 09.
  6. Nosal, Ed & Rocheteau, Guillaume, 2011. "Money, Payments, and Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262016281, June.
  7. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
  8. D. Aliprantis, C. & Camera, G. & Puzzello, D., 2007. "Anonymous markets and monetary trading," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1905-1928, October.
  9. Marcellus Andrews, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, by George A. Akerlof and Robert J. Shiller," Challenge, M.E. Sharpe, Inc., vol. 52(5), pages 126-131, September.
  10. Azariadis, Costas & Kaas, Leo, 2007. "Asset price fluctuations without aggregate shocks," Journal of Economic Theory, Elsevier, vol. 136(1), pages 126-143, September.
  11. Guillaume Rocheteau & Christopher Waller, 2005. "Bargaining and the value of money," Working Paper 0501, Federal Reserve Bank of Cleveland.
  12. David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," NBER Working Papers 7879, National Bureau of Economic Research, Inc.
  13. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
  14. Cynthia Harter, 2009. "Review of "Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism"," International Review of Economic Education, Economics Network, University of Bristol, vol. 8(1), pages 155-157.
  15. Carol C. Bertaut & Michael Haliassos, 2001. "Debt Revolvers for Self Control," University of Cyprus Working Papers in Economics 0208, University of Cyprus Department of Economics.
  16. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
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