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Financial Constraints, Endogenous Markups, and Self-fulfilling Equilibria

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  • Jess Benhabib
  • Pengfei Wang

Abstract

We show that self-fulfilling equilibria and indeterminacy can easily arise in a simple financial accelerator model with reasonable parameter calibrations and without increasing returns in production. A key feature for generating indeterminacy in our model is the countercyclical markup due to the procyclical loan to output ratio. We illustrate, via simulations, that our financial accelerator model can generate rich business cycle dynamics, including hump-shaped output in response to demand shocks as well as serial autocorrelation in output growth rates.

Suggested Citation

  • Jess Benhabib & Pengfei Wang, 2012. "Financial Constraints, Endogenous Markups, and Self-fulfilling Equilibria," NBER Working Papers 18074, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:18074
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    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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