Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints
Stephanie Schmitt-Grohe () and
No 26613, NBER Working Papers from National Bureau of Economic Research, Inc
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.
JEL-codes: E32 F38 F41 H23 (search for similar items in EconPapers)
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