Multiple Equilibria in Open Economy Models with Collateral Constraints: Overborrowing Revisited

Schmitt-Grohé, Stephanie and Martín Uribe ()
Authors registered in the RePEc Author Service: Stephanie Schmitt-Grohe

No 11623, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper establishes the existence of multiple equilibria in infinite-horizon open-economy models in which the value of tradable and nontradable endowments serves as collateral. In this environment, the economy displays self-fulfilling financial crises in which pessimistic views about the value of collateral induces agents to deleverage. The paper shows that 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; Overborrowing; Underborrowing; Financial crises; Capital controls (search for similar items in EconPapers)
JEL-codes: E44 F41 G01 H23 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Multiple Equilibria in Open Economy Models with Collateral Constraints: Overborrowing Revisited (2018)
Working Paper: Multiple Equilibria in Open Economy Models with Collateral Constraints: Overborrowing Revisited (2016)
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