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Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints

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  • Schmitt-Grohé, Stephanie
  • Uribe, Martín

Abstract

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.

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  • Schmitt-Grohé, Stephanie & Uribe, Martín, 2019. "Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints," CEPR Discussion Papers 14248, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14248
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    1. Javier Bianchi, 2011. "Overborrowing and Systemic Externalities in the Business Cycle," American Economic Review, American Economic Association, vol. 101(7), pages 3400-3426, December.
    2. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R., 2016. "Optimal capital controls and real exchange rate policies: A pecuniary externality perspective," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 147-165.
    3. Jeanne, Olivier & Korinek, Anton, 2019. "Managing credit booms and busts: A Pigouvian taxation approach," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 2-17.
    4. Paul Beaudry & Dana Galizia & Franck Portier, 2020. "Putting the Cycle Back into Business Cycle Analysis," American Economic Review, American Economic Association, vol. 110(1), pages 1-47, January.
    5. Jess Benhabib & Jianjun Miao & Pengfei Wang, 2016. "Chaotic banking crises and regulations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 393-422, February.
    6. Stephanie Schmitt-Grohé & Martín Uribe, 2017. "Is Optimal Capital Control Policy Countercyclical in Open Economy Models with Collateral Constraints?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(3), pages 498-527, August.
    7. Enrique G. Mendoza, 2002. "Credit, Prices, and Crashes: Business Cycles with a Sudden Stop," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 335-392, National Bureau of Economic Research, Inc.
    8. Enrique G. Mendoza, 2005. "Real Exchange Rate Volatility and the Price of Nontradable Goods in Economies Prone to Sudden Stops," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2005), pages 103-148, August.
    9. Rebucci, Alessandro & Ma, Chang, 2019. "Capital Controls: A Survey of the New Literature," CEPR Discussion Papers 14186, C.E.P.R. Discussion Papers.
    10. Enrique G. Mendoza, 2005. "Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies," NBER Working Papers 11691, National Bureau of Economic Research, Inc.
    11. Sebastian Edwards & Jeffrey A. Frankel, 2002. "Preventing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa02-2.
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    Cited by:

    1. Pierri, Damian Rene & Reffett, Kevin, 2021. "Memory, multiple equilibria and emerging market crises," UC3M Working papers. Economics 32871, Universidad Carlos III de Madrid. Departamento de Economía.
    2. Takao Asano & Akihisa Shibata & Masanori Yokoo, 2024. "Technology choice, externalities in production, and a chaotic middle-income trap," Journal of Economics, Springer, vol. 141(1), pages 29-56, January.
    3. 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).
    4. Carlos Esteban Posada Posada, 2020. "Crecimiento y ciclos de la economía colombiana (2005 – 2019)," Documentos de Trabajo de Valor Público 18255, Universidad EAFIT.
    5. Friedrich Lucke, 2022. "The Great Moderation and the Financial Cycle," Working Papers REM 2022/0238, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

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    More about this item

    Keywords

    Deterministic cycles; Chaos; Flow collateral constraints; Credit booms; Deleveraging; Pecuniary externality; Capital controls;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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