Cycles and self-fulfilling crises in open economies with stock collateral constraints under impatience

Suneil Parimoo

Journal of Mathematical Economics, 2024, vol. 112, issue C

Abstract: This paper analytically characterizes an infinite-horizon open economy with agents that are impatient relative to the market under a stock collateral constraint, whereby borrowing is collateralized by capital assets. Households can enjoy an unconstrained allocation under a long-run depression. However, under a stable output path, the constraint binds infinitely often, leading, in all periods, to reduced debt and deflated asset prices relative to the unconstrained allocation. Under plausible parametrizations, two and three-period cycles in consumption, debt, and asset prices can emerge under constant output. Further, high indebtedness can allow for multiple equilibria.

Keywords: Collateral constraints; Impatience; Multiple equilibria; Self-fulfilling crises; Deterministic cycles; Deleveraging (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:112:y:2024:i:c:s0304406824000442

DOI: 10.1016/j.jmateco.2024.102982

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