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Bubbles and Self-Enforcing Debt

Christian Hellwig and Guido Lorenzoni

No 12614, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods. First, we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period. Second, we provide an equivalence result, whereby the resulting set of equilibrium allocations with self-enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles; for the latter, there exist well known existence and characterization results. In contrast to the classic result by Bulow and Rogoff (AER 1989), positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives.

JEL-codes: D50 D52 D53 E40 F34 G10 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-dge and nep-mac
Note: AP EFG IFM
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Citations: View citations in EconPapers (7)

Published as Christian Hellwig & Guido Lorenzoni, 2009. "Bubbles and Self-Enforcing Debt," Econometrica, Econometric Society, vol. 77(4), pages 1137-1164, 07.

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Journal Article: Bubbles and Self-Enforcing Debt (2009) Downloads
Working Paper: Bubbles and Self-enforcing Debt (2006) Downloads
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