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Financial Constraints, Endogenous Markups, and Self-fulfilling Equilibria

Jess Benhabib () and Pengfei Wang ()

No 18074, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that self-fulfilling equilibria and indeterminacy can easily arise in a simple financial accelerator model with reasonable parameter calibrations and without increasing returns in production. A key feature for generating indeterminacy in our model is the countercyclical markup due to the procyclical loan to output ratio. We illustrate, via simulations, that our financial accelerator model can generate rich business cycle dynamics, including hump-shaped output in response to demand shocks as well as serial autocorrelation in output growth rates.

JEL-codes: E02 E2 E44 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
Note: EFG
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Published as Benhabib, Jess & Wang, Pengfei, 2013. "Financial constraints, endogenous markups, and self-fulfilling equilibria," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 789-805.

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