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Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints

Stephanie Schmitt-Grohé and Martin Uribe

No 14248, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper establishes the existence of deterministic 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: capital controls; Chaos; Credit Booms; Deleveraging; Deterministic cycles; flow collateral constraints; Pecuniary externality (search for similar items in EconPapers)
JEL-codes: E32 F38 F41 H23 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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