Deterministic debt cycles in open economies with flow collateral constraints

Stephanie Schmitt-Grohe and Martín Uribe

Journal of Economic Theory, 2021, vol. 192, issue C

Abstract: This paper establishes the existence of endogenous cycles in infinite-horizon open economy models with a flow collateral constraint. It shows that for plausible parameter configurations, the economy has a unique equilibrium exhibiting deterministic cycles in which periods of debt growth are followed by periods of debt deleveraging. In particular, three-period cycles exist, which implies by the Li-Yorke Theorem the presence of cycles of any periodicity and chaos. The paper also shows that deterministic cycles are absent in the Ramsey optimal allocation providing a justification for macroprudential policies even in the absence of uncertainty.

Keywords: Deterministic cycles; Collateral constraints; Capital controls (search for similar items in EconPapers)
JEL-codes: E32 F38 F41 H23 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints (2020)
Working Paper: Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:192:y:2021:i:c:s0022053121000120

DOI: 10.1016/j.jet.2021.105195

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