Working Paper: NBER ID: w22264
Authors: Stephanie Schmitt-Grohe; MartÃn Uribe
Abstract: This paper establishes the existence of multiple equilibria in infinite-horizon open- economy models in which the value of tradable and nontradable endowments serves as collateral. In this environment, the economy displays self-fulfilling financial crises in which pessimistic views about the value of collateral induces agents to deleverage. The paper shows that under plausible calibrations, there exist equilibria with underborrowing. This result stands in contrast to the overborrowing result stressed in the related literature. Underborrowing emerges in the present context because in economies that are prone to self-fulfilling financial crises, individual agents engage in excessive precautionary savings as a way to self-insure.
Keywords: multiple equilibria; open economy; collateral constraints; overborrowing; underborrowing
JEL Codes: E44; F41; G01; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| borrowing levels (H74) | value of collateral (G32) |
| value of collateral (G32) | borrowing levels (H74) |
| borrowing levels (H74) | self-fulfilling financial crises (G01) |
| pessimistic views about collateral values (G33) | deleveraging (G33) |
| deleveraging (G33) | self-fulfilling financial crises (G01) |
| nonconvexities in collateral constraints (D52) | multiple equilibria (D50) |
| multiple equilibria (D50) | underborrowing (G51) |