Working Paper: NBER ID: w11913
Authors: Martin Uribe
Abstract: This paper characterizes the equilibrium dynamics in an economy facing an aggregate debt ceiling. This borrowing limit is intended to capture an environment in which foreign investors base their lending decisions predominantly upon macro indicators. Individual agents do not internalize the borrowing constraint. Instead, a country interest-rate premium emerges to clear the financial market. The implied equilibrium dynamics are compared to those arising from a model in which the debt ceiling is imposed at the level of each individual agent. The central finding of the paper is that the economy with the aggregate borrowing limit does not generate higher levels of debt than the economy with the individual borrowing limit. That is, there is no overborrowing in equilibrium.
Keywords: No keywords provided
JEL Codes: F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate debt limit (H63) | interest rate dynamics (E43) |
| aggregate borrowing limit (H74) | debt levels (H63) |
| individual borrowing limit (G51) | debt levels (H63) |
| aggregate borrowing limit (H74) | no overborrowing in equilibrium (D53) |
| individual borrowing limit (G51) | no overborrowing in equilibrium (D53) |
| debt constraint internalization (F34) | individual saving decisions (D14) |
| debt limit binding (H63) | overborrowing (H74) |