Indeterminacy of Competitive Equilibrium with Risk of Default

Pietro Reichlin, Gaetano Bloise and Mario Tirelli ()

No 7477, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We prove indeterminacy of competitive equilibrium in sequential economies, where limited commitment requires the endogenous determination of solvency constraints preventing debt repudiation (Alvarez and Jermann (2000)). In particular, we show that, for any arbitrary value of social welfare in between autarchy and (constrained) optimality, there exists an equilibrium attaining that value. Our method consists in restoring Welfare Theorems for a weak notion of (constrained) optimality. The latter, inspired by Malinvaud (1953), corresponds to the absence of Pareto improving feasible redistributions over finite (though indefinite) horizons.

Keywords: Debt constraints; Default; Indeterminacy (search for similar items in EconPapers)
JEL-codes: D50 D52 D61 E44 G13 (search for similar items in EconPapers)
Date: 2009-09
New Economics Papers: this item is included in nep-bec
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Citations: View citations in EconPapers (2)

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Working Paper: INDETERMINACY OF COMPETITIVE EQUILIBRIUM WITH RISK OF DEFAULT (2009)
Working Paper: Indeterminacy of competitive equilibrium with risk of default (2009)
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