Existence and Non-Triviality of Equilibria in Economies with Default and Government

Jaime Orrillo and Jolive de Santana Filho Filho

Brazilian Review of Econometrics, 2020, vol. 39, issue 2

Abstract: This paper attempts to accommodate the government into Dubey, Geanakoplos and Shubik (2005) framework in an explicit way, and proves that a non-trivial equilibrium exists. By non-trivial equilibrium, we mean an equilibrium where there exists trading in the financial markets and some private borrower defaults. The government, characterised by its spending and tax plans\footnote{Both are assumed to be exogenous like in Gale (1990).}, enters our economic model by trading financial assets in order to balance its budget. Proof of existence is made by considering a generalised game \`a la Debreu (1952)\footnote{Already well known in the GEI literature.}, and its non-triviality is obtained by using the non-differentiable optimisation theory.

Date: 2020
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