Debt Limits and Credit Bubbles in General Equilibrium

Victor Filipe Martins da Rocha (), Toan Phan and Yiannis Vailakis ()
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Victor Filipe Martins da Rocha: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro]
Yiannis Vailakis: Adam Smith Business School - University of Glasgow
Authors registered in the RePEc Author Service: V. Filipe Martins-da-Rocha

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Abstract: We provide a novel characterization of self-enforcing debt limits in a general equilibrium framework of risk sharing with limited commitment, where defaulters are subject to recourse (a fractional loss of current and future endowments) and exclusion from future credit. We show that debt limits are exactly equal to the present value of recourse plus a credit bubble component. We provide applications to models of sovereign debt, private collateralized debt, and domestic public debt. Implications include an original equivalence mapping among distinct institutional arrangements, thereby clarifying the relationship between different enforcement mechanisms and the connection between asset and credit bubbles.

Keywords: Limited Commitment; General Equilibrium; Rational Credit Bubbles (search for similar items in EconPapers)
Date: 2019-10-27
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Citations: View citations in EconPapers (1)

Published in SSRN : Social Science Research Network, 2019, ⟨10.2139/ssrn.3463753⟩

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Working Paper: Debt Limits and Credit Bubbles in General Equilibrium (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02429759

DOI: 10.2139/ssrn.3463753

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