Credit Rationing in Unsecured Debt Markets

V. Filipe Martins-Da-Rocha (), Toan Phan () and Yiannis Vailakis ()
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V. Filipe Martins-Da-Rocha: LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - 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]
Toan Phan: The Federal Reserve Bank of Richmond
Yiannis Vailakis: University of Glasgow

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Abstract: In dynamic general equilibrium models featuring unsecured debt, the risk of default and the absence of collateral pose significant challenges to debt sustainability. Traditional models focus on the largest permissible debt limits consistent with repayment incentives and show that they inevitably form a bubble-current debt must be exactly rolled over indefinitely so that no effective repayment is ever made. This research challenges this paradigm by shifting the focus on equilibria with more restrictive debt limits. We establish that, under certain conditions, a credit rationing intervention can make everybody in the economy better off. By reassessing the choice and impact of debt ceilings in credit markets, we identify potential strategies to boost overall economic efficiency and welfare. Our findings shed light on the dynamics of unsecured debt markets and offer policymakers and economists a fresh perspective on managing debt without collateral.

Keywords: Limited commitment; Unsecured debt; Self-enforcing debt constraints; Bubbles; Pareto improvement; Credit rationing; Macroprudential policy (search for similar items in EconPapers)
Date: 2023-12-14
Note: View the original document on HAL open archive server: https://hal.science/hal-04370227v1
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