Working Paper: CEPR ID: DP14248
Authors: Stephanie Schmitt-Grohe; Martin Uribe
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.
Keywords: deterministic cycles; chaos; flow collateral constraints; credit booms; deleveraging; pecuniary externality; capital controls
JEL Codes: F41; F38; E32; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial frictions (G19) | cyclical fluctuations (E32) |
| flow collateral constraint (D10) | cyclical fluctuations (E32) |
| flow collateral constraint (D10) | deterministic cycles (C69) |
| debt growth (H63) | deleveraging (G33) |
| expansionary phase (E32) | credit boom (F65) |
| credit boom (F65) | deleveraging (G33) |
| deleveraging (G33) | depreciating real exchange rate (F31) |
| deleveraging (G33) | current account reversal (F32) |
| inefficient cycles (D61) | greater fluctuations in consumption (D11) |
| Ramsey planner's behavior (H00) | optimal capital control policies (F38) |
| optimal capital control policies (F38) | mitigate cycles (E32) |