Overborrowing and Systemic Externalities in the Business Cycle

Javier Bianchi

No 96, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: Credit constraints that link a private agent's debt to market-determined prices embody a credit externality that drives a wedge between competitive and constrained socially optimal equilibria, inducing private agents to ``overborrow." The externality arises because agents fail to internalize the price effects of additional borrowing when the credit constraint binds. We quantify the effects of this inefficiency in a two-sector DSGE model of a small open economy calibrated to emerging markets. The credit externality increases the probability of financial crises by a factor of 7 and causes the maximum drop in consumption to increase by 10 percentage points.

Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2010/paper_96.pdf (application/pdf)

Related works:
Journal Article: Overborrowing and Systemic Externalities in the Business Cycle (2011)
Working Paper: Overborrowing and systemic externalities in the business cycle (2009)
Working Paper: Overborrowing and Systemic Externalities in the Business Cycle (2009)
Working Paper: Overborrowing and Systemic Externalities in the Business Cycle (2009)
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:red:sed010:96

Access Statistics for this paper

More papers in 2010 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().