Working Paper: NBER ID: w26613
Authors: Stephanie Schmitt-Grohé; Martín Uribe
Abstract: This paper establishes the existence of deterministic cycles in infinite-horizon open economy models with a flow collateral constraint. It shows that for plausible parameter configurations, the economy has a unique equilibrium exhibiting deterministic cycles in which periods of debt growth are followed by periods of debt deleveraging. In particular, three-period cycles exist, which implies by the Li-Yorke Theorem the presence of cycles of any periodicity and chaos. The paper also shows that deterministic cycles are absent in the Ramsey optimal allocation providing a justification for macroprudential policies even in the absence of uncertainty.
Keywords: Debt Cycles; Open Economies; Flow Collateral Constraints; Financial Frictions
JEL Codes: E32; F38; F41; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial frictions (G19) | cyclical fluctuations (E32) |
| binding collateral constraint (G33) | oscillations in debt levels (E32) |
| impatient agents (L85) | front-load consumption (D12) |
| front-load consumption (D12) | rise in debt levels (H63) |
| rise in debt levels (H63) | deleveraging phase (G33) |
| deterministic cycles (C69) | greater consumption fluctuations (E20) |
| optimal capital control policies (F38) | elimination of cycles (C69) |