IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Asset Prices and Business Cycles Under Limited Commitment

  • Juha Ilmari Seppala

    (University of Chicago)

This paper presents a business-cycle model with heterogeneous agents that have access to complete markets but face endogenous borrowing and savings constraints. These constraints are motivated by the agents' limited commitment technology. In this environment, aggregate fluctuations are close to the ones generated by Pareto Optimal (full commitment) risk-sharing arrangements. However, endogenous borrowing and savings constraints force agents to underinvest in capital and increase the volatilities of both the stochastic discount factor and the price of equity. The mechanism explains simultaneously both high average returns on equity and low average returns on bonds. This is accomplished in the economy with relatively small exogenous shocks and a high degree of patience, and a low degree of risk-aversion on the part of the agents. Previous work on limited commitment has concentrated on endowment economies and has emphasized borrowing constraints. Numerical results in this paper suggest that when capital is added to such models, savings constraints play even more central role.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: main text
Download Restriction: no

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0244.

in new window

Date of creation: 01 Aug 2000
Date of revision:
Handle: RePEc:ecm:wc2000:0244
Contact details of provider: Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Patrick J. Kehoe & Fabrizio Perri, 2000. "International Business Cycles with Endogenous Incomplete Markets," NBER Working Papers 7870, National Bureau of Economic Research, Inc.
  2. Lawrence J. Christiano & Jonas D. M. Fisher, 1994. "Algorithms for solving dynamic models with occasionally binding constraints," Staff Report 171, Federal Reserve Bank of Minneapolis.
  3. Harold L. Cole & Narayana R. Kocherlakota, 1999. "Efficient allocations with hidden income and hidden storage," Staff Report 238, Federal Reserve Bank of Minneapolis.
  4. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  5. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 1998. "Mutual Insurance, Individual Savings and Limited Commitment," Keele Department of Economics Discussion Papers (1995-2001) 98/14, Department of Economics, Keele University.
  6. John H. Cochrane & Lars Peter Hansen, 1992. "Asset Pricing Explorations for Macroeconomics," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 115-182 National Bureau of Economic Research, Inc.
  7. Den Haan, Wouter J., 1997. "Solving Dynamic Models With Aggregate Shocks And Heterogeneous Agents," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 355-386, June.
  8. Albert Marcet & Ramon Marimon, 1994. "Recursive contracts," Economics Working Papers 337, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1998.
  9. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Papers 411, Stockholm - International Economic Studies.
  10. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  11. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1995. "Asset Pricing Lessons for Modeling Business Cycles," NBER Working Papers 5262, National Bureau of Economic Research, Inc.
  12. Sanford J. Grossman & Angelo Melino & Robert J. Shiller, 1985. "Estimating the Continuous Time Consumption Based Asset Pricing Model," NBER Working Papers 1643, National Bureau of Economic Research, Inc.
  13. Alvarez, Fernando & Jermann, Urban J, 2001. "Quantitative Asset Pricing Implications of Endogenous Solvency Constraints," Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1117-51.
  14. Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 595-609, October.
  15. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  16. David K. Backus & Allan W. Gregory & Stanley E. Zin, 1986. "Risk Premiums in the Term Structure : Evidence from Artificial Economies," Working Papers 665, Queen's University, Department of Economics.
  17. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August.
  18. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 1999. "Habit persistence, asset returns and the business cycles," Working Paper Series WP-99-14, Federal Reserve Bank of Chicago.
  19. Timothy J. Kehoe & David K. Levine, 1992. "Debt constrained asset markets," Working Papers 445, Federal Reserve Bank of Minneapolis.
  20. Lawrence J. Christiano & Jonas D. M. Fisher, 2003. "Stock Market and Investment Goods Prices: Implications for Macroeconomics," NBER Working Papers 10031, National Bureau of Economic Research, Inc.
  21. Thomas Tallarini, . "Risk-Sensitive Real Business Cycles," GSIA Working Papers 1997-35, Carnegie Mellon University, Tepper School of Business.
  22. S.G. Cecchetti & P. Lam & N.C. Mark, 2010. "The equity premium and the risk-free rate: matching the moments," Levine's Working Paper Archive 1396, David K. Levine.
  23. Juha Ilmari Seppala, 2000. "The Term Structure of Real Interest Rates: Theory and Evidence from the U.K. Index-Linked Bonds," Econometric Society World Congress 2000 Contributed Papers 0245, Econometric Society.
  24. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  25. Luttmer, Erzo G J, 1996. "Asset Pricing in Economies with Frictions," Econometrica, Econometric Society, vol. 64(6), pages 1439-67, November.
  26. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  27. Braverman, Avishay & Stiglitz, Joseph E, 1982. "Sharecropping and the Interlinking of Agrarian Markets," American Economic Review, American Economic Association, vol. 72(4), pages 695-715, September.
  28. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
  29. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:0244. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.