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Endogeneous Labor Supply, Borrowing Constraint and Credit Cycles

Author

Listed:
  • Anna Agliari

    () (DISCE, Università Cattolica)

  • George Vachadze

    () (CUNY, New York (USA))

Abstract

We investigate Matsuyama's (Econometrica, 72, pp. 853-84, 2004) model modi- fied only to include endogenous and forward looking labor supply decision. Young agents supply one unit of labor endowment elastically to a competitive labor market. While, old agents of ex-ante identical individuals are divided in equi- librium into depositors and entrepreneurs. Depositors lend funds in the form of interest bearing loans, while entrepreneurs borrow funds in the competitive credit market. We emphasize the interaction between credit and labor markets and show the possibility of occurrence of multiple steady states, local and global indeterminacy, and endogenous fluctuations. When young agents become optimistic about the future deposit rate then they decide to work harder and invest more. Countercyclical borrowing constraint will help agents to fulfill their initial optimistic expectations, because the next period credit volume and deposit rate can increase simultaneously. By conducting global bifurcation analysis, we show that credit cycles can occur through a self- fulfilling expectation mechanism. History-versus-expectations considerations can exist and escape from underdevelopment as well as fall into poverty can to be a self-fulfilling prophecy.

Suggested Citation

  • Anna Agliari & George Vachadze, 2010. "Endogeneous Labor Supply, Borrowing Constraint and Credit Cycles," DISCE - Quaderni del Dipartimento di Scienze Economiche e Sociali dises1059, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  • Handle: RePEc:ctc:serie2:dises1059
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    File URL: http://www.unicatt.it/dipartimenti/DISES/allegati/dises1059.pdf
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    Cited by:

    1. Anna Agliari & George Vachadze, 2011. "Homoclinic and Heteroclinic Bifurcations in an Overlapping Generations Model with Credit Market Imperfection," Computational Economics, Springer;Society for Computational Economics, vol. 38(3), pages 241-260, October.

    More about this item

    Keywords

    Borrowing constraint; Credit cycles; Elastic labor supply; Endogenous fluctuations; Self-fulfilling expectations.;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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