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Collateral constraints and macroeconomic volatility

Winfried Koeniger and Thomas Hintermaier

No 390, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: We show how realistic occasionally binding collateral constraints increase macroeconomic volatility. Collateral constraints imply that the effect of consumers' choices on the price of collateral feeds back into the set of feasible choices, thus giving rise to multiple equilibria. We characterize how the possibility of multiple equilibria depends on aggregate wealth. We find that for low levels of wealth the economy is vulnerable to changes of consumer confidence (sunspots) which increase the volatility of prices and consumption.

Date: 2012
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