Working Paper: NBER ID: w18074
Authors: Jess Benhabib; Pengfei Wang
Abstract: We show that self-fulfilling equilibria and indeterminacy can easily arise in a simple financial accelerator model with reasonable parameter calibrations and without increasing returns in production. A key feature for generating indeterminacy in our model is the countercyclical markup due to the procyclical loan to output ratio. We illustrate, via simulations, that our financial accelerator model can generate rich business cycle dynamics, including hump-shaped output in response to demand shocks as well as serial autocorrelation in output growth rates.
Keywords: financial constraints; endogenous markups; self-fulfilling equilibria
JEL Codes: E02; E2; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimistic expectations about future output (E66) | increased lending to financially constrained firms (G21) |
| increased lending to financially constrained firms (G21) | higher output levels (E23) |
| higher output levels (E23) | increased value of collateral (G32) |
| increased value of collateral (G32) | relaxed borrowing constraints (G51) |
| relaxed borrowing constraints (G51) | expansion of production (E23) |
| expansion of production (E23) | decrease in marginal costs (D40) |
| decrease in marginal costs (D40) | increase in markups (D43) |
| increased markups (D43) | feedback loop fulfilling initial expectations (D84) |