Endogenous Credit Cycles

Chao Gu and Randall Wright

No 17510, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.

JEL-codes: E32 E44 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-cis, nep-dge and nep-mac
Note: EFG
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Citations: View citations in EconPapers (9)

Published as Chao Gu & Fabrizio Mattesini & Cyril Monnet & Randall Wright, 2013. "Endogenous Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 121(5), pages 940 - 965.

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Related works:
Working Paper: Endogenous credit cycles (2011)
Working Paper: Endogenous Credit Cycles (2011)
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