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Sunspots and Credit Frictions

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  • Sharon Harrison

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  • Mark Weder

    ()

Abstract

We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumer¡¯s choice of leisure. Unlike this model without a collateral constraint, we find that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulfilling expectations. This is the case for more realistic parametrizations than in previous, similar models without these features.

Suggested Citation

  • Sharon Harrison & Mark Weder, 2010. "Sunspots and Credit Frictions," CDMA Working Paper Series 201001, Centre for Dynamic Macroeconomic Analysis.
  • Handle: RePEc:san:cdmawp:1001
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    File URL: http://www.st-andrews.ac.uk/~wwwecon/CDMA/papers/wp1001.pdf
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Sunspots and Credit Frictions
      by Christian Zimmermann in NEP-DGE blog on 2010-01-25 09:20:38

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    Cited by:

    1. NUTAHARA Kengo, 2010. "Asset Prices and Monetary Policy in a Sticky-Price Economy with Financial Frictions," Discussion papers 10060, Research Institute of Economy, Trade and Industry (RIETI).
    2. Costas Azariadis & Leo Kaas & Yi Wen, 2016. "Self-Fulfilling Credit Cycles," Review of Economic Studies, Oxford University Press, vol. 83(4), pages 1364-1405.
    3. 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.
    4. Chen, Shu-Hua & Guo, Jang-Ting, 2014. "Progressive taxation and macroeconomic (in)stability with utility-generating government spending," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 174-183.
    5. Jang-Ting Guo & Sharon G. Harrison, 2015. "Indeterminacy with Progressive Taxation and Sector-Specific Externalities," Pacific Economic Review, Wiley Blackwell, vol. 20(2), pages 268-281, May.
    6. Chen, Shu-Hua, 2015. "Macroeconomic (In)Stability Of Interest Rate Rules In A Model With Banking System And Reserve Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 19(07), pages 1476-1508, October.

    More about this item

    Keywords

    Business cycles; Credit markets; Collateral Constraint; Sunspots.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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