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Sunspots and Credit Frictions

Author

Listed:
  • Sharon G. Harrison

    (Department of Economics, Barnard College, Columbia University)

  • Mark Weder

    (School of Economics, University of Adelaide)

Abstract

We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumer's choice of leisure. Unlike this model without a collateral constraint, we find that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulfilling expectations. This is the case for more realistic parametrizations than in previous, similar models without these features.

Suggested Citation

  • Sharon G. Harrison & Mark Weder, 2010. "Sunspots and Credit Frictions," School of Economics and Public Policy Working Papers 2010-02, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2010-02
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2010-02.pdf
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    Cited by:

    1. Costas Azariadis & Leo Kaas & Yi Wen, 2016. "Self-Fulfilling Credit Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(4), pages 1364-1405.
    2. Nutahara, Kengo, 2010. "Asset prices and monetary policy in a sticky-price economy with financial frictions," MPRA Paper 24113, University Library of Munich, Germany.
    3. Cui, Wei & Kaas, Leo, 2021. "Default cycles," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 377-394.
    4. Nutahara, Kengo, 2015. "Do credit market imperfections justify a central bank׳s response to asset price fluctuations?," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 81-94.
    5. Chen, Shu-Hua, 2015. "Macroeconomic (In)Stability Of Interest Rate Rules In A Model With Banking System And Reserve Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 19(7), pages 1476-1508, October.
    6. Chen, Shu-Hua & Guo, Jang-Ting, 2014. "Progressive taxation and macroeconomic (in)stability with utility-generating government spending," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 174-183.
    7. Jang-Ting Guo & Sharon G. Harrison, 2015. "Indeterminacy with Progressive Taxation and Sector-Specific Externalities," Pacific Economic Review, Wiley Blackwell, vol. 20(2), pages 268-281, May.

    More about this item

    Keywords

    business cycles; credit markets; collateral constraint; sunspots;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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