Working Paper: NBER ID: w17510
Authors: Chao Gu; Randall Wright
Abstract: We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.
Keywords: credit cycles; limited commitment; animal spirits; equilibria; Nash bargaining; Walrasian pricing
JEL Codes: E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Limited commitment (D86) | Endogenous borrowing constraints (F65) |
| Agents' beliefs (D83) | Credit cycles (E32) |
| Agents' beliefs (D83) | Credit conditions (G21) |
| Credit conditions (G21) | Credit cycles (E32) |
| Nash bargaining (C79) | Non-monotonic outcomes (D91) |
| Walrasian pricing (D41) | Monotonic outcomes (C29) |
| Beliefs amplify shocks to fundamentals (E71) | Credit market dynamics (E44) |