Working Paper: NBER ID: w12614
Authors: Christian Hellwig; Guido Lorenzoni
Abstract: We characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods. First, we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period. Second, we provide an equivalence result, whereby the resulting set of equilibrium allocations with self-enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles; for the latter, there exist well known existence and characterization results. In contrast to the classic result by Bulow and Rogoff (AER 1989), positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives.
Keywords: No keywords provided
JEL Codes: D50; D52; D53; E40; F34; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interest rate (E43) | sustainability of debt (F34) |
| debt limits (H63) | repayment behavior of agents (G51) |
| self-enforcing private debt (F34) | unbacked public debt (H63) |
| interest rate (E43) | repayment incentives (J33) |
| debt limits allow for exact rollover (H63) | self-enforcement of debt (F34) |