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Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints

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  • Stephanie Schmitt-Grohé
  • Martín Uribe

Abstract

This paper establishes the existence of deterministic cycles in infinite-horizon open economy models with a flow collateral constraint. It shows that for plausible parameter configurations, the economy has a unique equilibrium exhibiting deterministic cycles in which periods of debt growth are followed by periods of debt deleveraging. In particular, three-period cycles exist, which implies by the Li-Yorke Theorem the presence of cycles of any periodicity and chaos. The paper also shows that deterministic cycles are absent in the Ramsey optimal allocation providing a justification for macroprudential policies even in the absence of uncertainty.

Suggested Citation

  • Stephanie Schmitt-Grohé & Martín Uribe, 2020. "Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints," NBER Working Papers 26613, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26613
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    References listed on IDEAS

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    1. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R., 2016. "Optimal capital controls and real exchange rate policies: A pecuniary externality perspective," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 147-165.
    2. Paul Beaudry & Dana Galizia & Franck Portier, 2020. "Putting the Cycle Back into Business Cycle Analysis," American Economic Review, American Economic Association, vol. 110(1), pages 1-47, January.
    3. Ma, Chang & Rebucci, Alessandro, 2019. "Capital Controls: A Survey of the New Literature," CEPR Discussion Papers 14186, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Carlos Esteban Posada Posada, 2020. "Crecimiento y ciclos de la economía colombiana (2005 – 2019)," Documentos de Trabajo CIEF 018255, Universidad EAFIT.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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