MEMORY, MULTIPLE EQUILIBRIA AND EMERGING MARKET CRISES

Damian Pierri

No 2021-62, Documentos de trabajo del Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET) from Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET)

Abstract: We present a new Generalized Markov Equilibrium (GME) approach to studying sudden stops and financial crises in emerging countries in the canonical small open economy model with equilib-rium price-dependent collateral constraints. Our approach to characterizing and computing stochastic equilibrium dynamics is global, encompasses recursive equilibrium as a special case, yet allows for a much more flexible approach to modeling memory in such models that are known to have multiple equilibrium. We prove the existence of ergodic GME selections from the set of sequential competitive equilibrium, and show that at the same time ergodic GME selectors can replicate all the observed phases of the macro crises associated with a sudden stop (boom, collapse, spiralized recession, recov-ery) while still being able to capture the long-run stylized behavior of the data. We also compute stochastic equilibrium dynamics associated with stationary and nonstationary GME selections, and we find that: a) the ergodic GME selectors generate stochastic dynamics that are less financially constrained with respect to stationary non-ergodic paths; and, b) non-stationary GME selections ex-hibit a great range of fluctuations in macroeconomic aggregates compared to the stationary selections. From a theoretical perspective, we prove the existence of both sequential competitive equilibrium and (minimal state space) recursive equilibrium, as well as provide a complete theory of robust recursive equilibrium comparative statics in deep parameters. Consistent with recent results in the literature, relative to the set of recursive equilibrium, we find 2 stationary equilibrium: one with high/over borrowing, the other with low/under borrowing. These equilibrium are extremal and “self-fulfilling” under rational expectations. The selection among these equilibria depend on observable variables and not on sunspots.

Keywords: Financial Crises; Sudden Stops; Small Open Economies; Ergodicity; Recursive Equilibrium; Generalized Markov Equilibria (search for similar items in EconPapers)
JEL-codes: C6 D52 F32 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2021-06
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Memory, multiple equilibria and emerging market crises (2021)
Working Paper: Memory, Multiple Equilibria and Emerging Market Crises (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ake:iiepdt:202162

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