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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.

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  • 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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    1. Financial Constraints, Endogenous Markups, and Self-fulfilling Equilibria
      by Christian Zimmermann in NEP-DGE blog on 2012-05-26 01:35:50

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    4. Costas Azariadis, 2018. "Credit Cycles and Business Cycles," Review, Federal Reserve Bank of St. Louis, vol. 100(1).
    5. Nutahara, Kengo, 2015. "Do credit market imperfections justify a central bank׳s response to asset price fluctuations?," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 81-94.
    6. Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "A Macroeconomic Model with Financial Panics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(1), pages 240-288.
    7. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Endogenous information acquisition and countercyclical uncertainty," Journal of Economic Theory, Elsevier, vol. 165(C), pages 601-642.
    8. Benhabib, Jess & Dong, Feng & Wang, Pengfei, 2018. "Adverse selection and self-fulfilling business cycles," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 114-130.
    9. Laura Nowzohour & Livio Stracca, 2020. "More Than A Feeling: Confidence, Uncertainty, And Macroeconomic Fluctuations," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 691-726, September.
    10. Feng Dong & Pengfei Wang & Yi Wen, 2016. "Credit search and credit cycles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 215-239, February.
    11. Kazuo Mino, 2017. "Sunspot-Driven Business Cycles: An Overview," KIER Working Papers 973, Kyoto University, Institute of Economic Research.
    12. Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "Credit Booms, Financial Crises, and Macroprudential Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 8-33, August.
    13. Jess Benhabib & Jianjun Miao & Pengfei Wang, 2016. "Chaotic banking crises and regulations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 393-422, February.
    14. Patrick A. Pintus & Yi Wen & Xiaochuan Xing, 2015. "Interest Rate Dynamics, Variable-Rate Loan Contracts, and the Business Cycle," Working Papers 2015-32, Federal Reserve Bank of St. Louis.
    15. Pintus, Patrick A. & Wen, Yi & Xing, Xiaochuan, 2022. "The inverted leading indicator property and redistribution effect of the interest rate," European Economic Review, Elsevier, vol. 148(C).
    16. Manuel Amador & Javier Bianchi, 2021. "Bank Runs, Fragility, and Credit Easing," NBER Working Papers 29397, National Bureau of Economic Research, Inc.
    17. Kazuo Mino, 2016. "Fiscal Policy in a Growing Economy with Financial Frictions and Firm Heterogeneity," The Japanese Economic Review, Japanese Economic Association, vol. 67(1), pages 3-30, March.
    18. Fehr, Dietmar & Heinemann, Frank & Llorente-Saguer, Aniol, 2019. "The power of sunspots: An experimental analysis," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 123-136.
    19. Gliksberg, Baruch, 2016. "Equilibria under monetary and fiscal policy interactions in a portfolio choice model," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 209-228.
    20. Oscar Pavlov & Mark Weder, 2017. "Product Scope and Endogenous Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 24, pages 175-191, March.
    21. Yi Wen & Xiaochuan Xing & Patrick Pintus, 2016. "Interest Rate Dynamics, Variable-Rate Loans, and the Business Cycle," 2016 Meeting Papers 293, Society for Economic Dynamics.
    22. Bruce McGough & Ryuichi Nakagawa, 2019. "Stability of Sunspot Equilibria under Adaptive Learning with Imperfect Information," Working Papers on Central Bank Communication 005, University of Tokyo, Graduate School of Economics.
    23. Brianti, Marco & Cormun, Vito, 2023. "Expectation-Driven Boom-Bust Cycles," Working Papers 2023-4, University of Alberta, Department of Economics.
    24. Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "Credit Booms, Financial Crises and Macroprudential Policy," Working Papers 2020-62, Princeton University. Economics Department..
    25. Cui, Wei & Kaas, Leo, 2021. "Default cycles," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 377-394.

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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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