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Credit markets, limited commitment, and government debt

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  • Francesca Carapella
  • Stephen D. Williamson

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

  • Francesca Carapella & Stephen D. Williamson, 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. Wang, Zijian, 2020. "Liquidity and private information in asset markets: To signal or not to signal," Journal of Economic Theory, Elsevier, vol. 190(C).
    3. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 73533, University Library of Munich, Germany.
    4. 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.
    5. 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.
    6. Bethune, Zachary & Hu, Tai-Wei & Rocheteau, Guillaume, 2018. "Indeterminacy in credit economies," Journal of Economic Theory, Elsevier, vol. 175(C), pages 556-584.
    7. 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.
    8. Chao Gu & Fabrizio Mattesini & Randall Wright, 2015. "Money and Credit Redux," Working Papers 1508, Department of Economics, University of Missouri.
    9. Ohik Kwon & Manjong Lee, 2016. "Credit Market Frictions and Coessentiality of Money and Credit," Discussion Paper Series 1602, Institute of Economic Research, Korea University.
    10. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 73707, University Library of Munich, Germany.
    11. Pierre Yared & Marina Azzimonti, 2017. "The Public and Private Provision of Safe Assets," 2017 Meeting Papers 755, Society for Economic Dynamics.
    12. Carli, Francesco & Gomis-Porqueras, Pedro, 2021. "Real consequences of open market operations: The role of limited commitment," European Economic Review, Elsevier, vol. 132(C).
    13. Azzimonti, Marina & Yared, Pierre, 2019. "The optimal public and private provision of safe assets," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 126-144.
    14. Francesca Carapella, 2017. "Credit markets, Limited commitment and Optimal monetary policy," 2017 Meeting Papers 1523, Society for Economic Dynamics.
    15. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 74615, University Library of Munich, Germany.
    16. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 75869, University Library of Munich, Germany.

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    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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