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Indeterminacy in credit economies

Zachary Bethune (), Tai-Wei Hu and Guillaume Rocheteau

Journal of Economic Theory, 2018, vol. 175, issue C, 556-584

Abstract: We characterize the equilibrium set of a two-good, pure-credit economy with limited commitment, under both pairwise and centralized meetings. We show that the set of equilibria derived under “not-too-tight” solvency constraints (Alvarez and Jermann, 2000) commonly used in the literature is of measure zero in the whole set of Perfect Bayesian Equilibria. There exist a continuum of stationary equilibria, a continuum of endogenous credit cycles of any periodicity, and a continuum of sunspot equilibria, irrespective of the assumed trading mechanism. Equilibria featuring “too-tight” solvency constraints can generate growing credit limits over time, periodic credit shutdowns, and heterogeneous debt limits across ex-ante identical borrowers. Moreover, we provide examples of credit cycles that dominate, from a social welfare point of view, all equilibria with “not-too-tight” solvency constraints.

Keywords: Credit cycles; Limited commitment; Money (search for similar items in EconPapers)
JEL-codes: D83 E32 E51 (search for similar items in EconPapers)
Date: 2018
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