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Credit markets, limited commitment, and government debt

Author

Listed:
  • Williamson, Stephen D.

    (Washington University in St. Louis)

  • Carapella, Francesca

    (Board of Governors of the Federal Reserve System)

Abstract

A dynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers’ incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not.

Suggested Citation

  • Williamson, Stephen D. & Carapella, Francesca, 2014. "Credit markets, limited commitment, and government debt," Working Papers 2014-10, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2014-010
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    References listed on IDEAS

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    Cited by:

    1. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 74010, University Library of Munich, Germany.
    2. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 73707, University Library of Munich, Germany.
    3. Chao Gu & Fabrizio Mattesini & Randall Wright, 2016. "Money and Credit Redux," Econometrica, Econometric Society, vol. 84, pages 1-32, January.
    4. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 73533, University Library of Munich, Germany.
    5. Ohik Kwon & Manjong Lee, 2016. "Credit Market Frictions and Coessentiality of Money and Credit," Discussion Paper Series 1602, Institute of Economic Research, Korea University.
    6. Pierre Yared & Marina Azzimonti, 2017. "The Public and Private Provision of Safe Assets," 2017 Meeting Papers 755, Society for Economic Dynamics.
    7. Kiyotaki, Nobuhiro & Lagos, Ricardo & Wright, Randall, 2016. "Introduction to the symposium issue on money and liquidity," Journal of Economic Theory, Elsevier, vol. 164(C), pages 1-9.
    8. Chao He & Randall Wright & Yu Zhu, 2015. "Housing and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 435-455, July.
    9. repec:eee:jetheo:v:175:y:2018:i:c:p:556-584 is not listed on IDEAS
    10. Francesca Carapella, 2017. "Credit markets, Limited commitment and Optimal monetary policy," 2017 Meeting Papers 1523, Society for Economic Dynamics.
    11. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 74615, University Library of Munich, Germany.
    12. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 75869, University Library of Munich, Germany.
    13. Athanasios Geromichalos & Jiwon Lee & Seungduck Lee & Keita Oikawa, 2016. "Over-the-counter trade and the value of assets as collateral," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 443-475, August.
    14. Chao Gu & Fabrizio Mattesini & Randall Wright, 2015. "Money and Credit Redux," Working Papers 1508, Department of Economics, University of Missouri.

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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