SUNSPOTS AND CREDIT FRICTIONS

Sharon G. Harrison and Mark Weder

Macroeconomic Dynamics, 2013, vol. 17, issue 5, 1055-1069

Abstract: We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumer's choice of leisure. Unlike this model without a collateral constraint, we find that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulfilling expectations. This is the case for more realistic parameterizations than in previous, similar models without these features.

Date: 2013
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Working Paper: Sunspots and Credit Frictions (2010)
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