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Revisiting Overborrowing and its Policy Implications

  • Gianluca Benigno
  • Huigang Chen
  • Christopher Otrok
  • Alessandro Rebucci

    ()

  • Eric Young

This paper analyzes quantitatively the extent to which there is overborrowing (i.e., inefficient borrowing) in a business cycle model for emerging market economies with production and an occasionally binding credit constraint. The main finding of the analysis is that overborrowing is not a robust feature of this class of model economies: it depends on the structure of the economy and its parametrization. Specifcally, underborrowing in a production economy is found with the baseline calibration, but overborrowing with more impatient agents and more volatile shocks. Endowment economies display overborrowing regardless of parameter values, but they do not allow for policy intervention when the constraint binds (in crisis times). Quantitatively, the welfare gains from implementing the constrained¬effcient allocation are always larger near crisis times than in normal ones. In production economies, they are one order of magnitude larger than in endowment economies both in crisis and normal times. This suggests that the scope for economy¬widemacro¬prudential policy interventions (e.g., prudential taxation of capital flows and capital controls) is weak in this class of models.

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Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4676.

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Date of creation: Jul 2010
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Handle: RePEc:idb:wpaper:4676
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  1. Timothy J. Kehoe & Kim J. Ruhl, 2007. "Are Shocks to the Terms of Trade Shocks to Productivity?," NBER Working Papers 13111, National Bureau of Economic Research, Inc.
  2. Jonathan David Ostry & Carmen Reinhart, 1991. "Private Saving and Terms of Trade Shocks; Evidence From Developing Countries," IMF Working Papers 91/100, International Monetary Fund.
  3. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R, 2011. "Financial Crisis and Macro-Prudential Policies," CEPR Discussion Papers 8175, C.E.P.R. Discussion Papers.
  4. Bianchi, Javier, 2009. "Overborrowing and Systemic Externalities in the Business Cycle," MPRA Paper 16270, University Library of Munich, Germany.
  5. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  6. Kumar, Praveen & Seppi, Duane J, 1994. "Information and Index Arbitrage," The Journal of Business, University of Chicago Press, vol. 67(4), pages 481-509, October.
  7. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  8. Jonathan David Ostry & Atish R. Ghosh & Karl Friedrich Habermeier & Marcos Chamon & Mahvash Saeed Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows: The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
  9. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  10. Ricardo J Caballero, 2010. "Sudden Financial Arrest," IMF Economic Review, Palgrave Macmillan, vol. 58(1), pages 6-36, August.
  11. Nikolov, Kalin, 2010. "Is Private Leverage Excessive?," MPRA Paper 28407, University Library of Munich, Germany, revised Jun 2010.
  12. Reinhart, Carmen & Ostry, Jonathan, 1992. "Saving and Terms of Trade Shocks: Evidence from Developing Countries," MPRA Paper 6976, University Library of Munich, Germany.
  13. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
  14. Richard Arnott & Bruce Greenwald & Joseph E. Stiglitz, 1993. "Information and Economic Efficiency," NBER Working Papers 4533, National Bureau of Economic Research, Inc.
  15. Timothy J. Kehoe & Kim Ruhl, 2008. "Data Appendix to "Are Shocks to the Terms of Trade Shocks to Productivity?"," Technical Appendices 07-40, Review of Economic Dynamics.
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