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Cycles and self-fulfilling crises in open economies with stock collateral constraints under impatience

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  • Parimoo, Suneil

Abstract

This paper analytically characterizes an infinite-horizon open economy with agents that are impatient relative to the market under a stock collateral constraint, whereby borrowing is collateralized by capital assets. Households can enjoy an unconstrained allocation under a long-run depression. However, under a stable output path, the constraint binds infinitely often, leading, in all periods, to reduced debt and deflated asset prices relative to the unconstrained allocation. Under plausible parametrizations, two and three-period cycles in consumption, debt, and asset prices can emerge under constant output. Further, high indebtedness can allow for multiple equilibria.

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  • Parimoo, Suneil, 2024. "Cycles and self-fulfilling crises in open economies with stock collateral constraints under impatience," Journal of Mathematical Economics, Elsevier, vol. 112(C).
    • Handle: RePEc:eee:mateco:v:112:y:2024:i:c:s0304406824000442
    DOI: 10.1016/j.jmateco.2024.102982
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