The Role of Collateral in Sudden Stop Models

Bingbing Dong, Jieran Wu and Eric Young

China & World Economy, 2023, vol. 31, issue 6, 79-110

Abstract: This paper examines the role of collateral in sudden stop models that feature occasionally binding constraints and endogenous growth. It shows how different assumptions regarding the nature and valuation of collateral alter the dynamics of crisis episodes and the welfare costs of pecuniary externalities. For example, in a model with land as collateral, valuing collateral at the “expected future price” leads to substantially weaker Fisherian deflation effects than the case with collateral valued at the “current price.” However, the average size of sudden stops in the two economies are similar because households endogenously avoid the region where large sudden stops would occur. The differences between different collateral valuations and the size of sudden stops are amplified when we abstract from endogenous growth. In another case, assuming collateral is income rather than land leads to smaller sudden stops as income is less volatile than asset prices. Finally, we show that some choices lead to constrained or conditionally efficient allocations whereas others generate inefficiencies, but these inefficiencies are small.

Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/cwe.12510

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:chinae:v:31:y:2023:i:6:p:79-110

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1671-2234

Access Statistics for this article

China & World Economy is currently edited by Yongding Yu

More articles in China & World Economy from Institute of World Economics and Politics, Chinese Academy of Social Sciences Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().