Multiple Equilibria in Open Economies with Collateral Constraints

Stephanie Schmitt-Grohe and Martín Uribe

The Review of Economic Studies, 2021, vol. 88, issue 2, 969-1001

Abstract: This article establishes the existence of multiple equilibria in infinite-horizon open economy models in which the value of tradable and non-tradable endowments serves as collateral. In this environment, the economy displays self-fulfilling financial crises in which pessimistic views about the value of collateral induce agents to deleverage. Under plausible calibrations, there exist equilibria with underborrowing. This result stands in contrast to the overborrowing result stressed in the related literature. Underborrowing emerges in the present context because in economies that are prone to self-fulfilling financial crises, individual agents engage in excessive precautionary savings as a way to self-insure.

Keywords: Pecuniary externalities; Collateral constraints; Multiple equilibria; Sudden stop; Overborrowing; Underborrowing; Self-fulfilling financial crises; Capital controls; E44; F41; G01; H23 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:88:y:2021:i:2:p:969-1001.

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