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Collateral constraints and macroeconomic volatility

Author

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  • Winfried Koeniger

    (Queen Mary University of London)

  • Thomas Hintermaier

    (Economics, Univ Bonn)

Abstract

We show how realistic occasionally binding collateral constraints increase macroeconomic volatility. Collateral constraints imply that the effect of consumers' choices on the price of collateral feeds back into the set of feasible choices, thus giving rise to multiple equilibria. We characterize how the possibility of multiple equilibria depends on aggregate wealth. We find that for low levels of wealth the economy is vulnerable to changes of consumer confidence (sunspots) which increase the volatility of prices and consumption.

Suggested Citation

  • Winfried Koeniger & Thomas Hintermaier, 2012. "Collateral constraints and macroeconomic volatility," 2012 Meeting Papers 390, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:390
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    References listed on IDEAS

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    9. Hintermaier, Thomas & Koeniger, Winfried, 2010. "The method of endogenous gridpoints with occasionally binding constraints among endogenous variables," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2074-2088, October.
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