Endogenous Debt Constraints in Lifecycle Economies

The Review of Economic Studies, Vol 70, Issue 3, pp. 461-487, 2003

38 Pages Posted: 7 Aug 2009

See all articles by Luisa Lambertini

Luisa Lambertini

Ecole Polytechnique Fédérale de Lausanne

Costas Azariadis

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: September 13, 2002

Abstract

We characterize competitive equilibria with perfect foresight in a deterministic, three-period pure-exchange overlapping generations economy with perfect information and no commitment to loan contracts. Commitment is replaced by an enforcement mechanism that excludes defaulters from asset markets for one period. For hump-shaped endowment profiles, young individuals face endogenous debt constraints that ration current consumption. Changes in current and future yields affect these constraints, inducing an additional income effect on rationed household demand that makes current and future consumption complements. This mechanism can lead to multiple steady states, persistent indeterminacy and regime switching. We show that sensitivity to shocks and complex dynamic behavior are consistent with endogenous debt limits but not with exogenous liquidity constraints.

Keywords: debt constraint, default, intertemporal consumer choice, lifecycle model

JEL Classification: E32, D91, D52

Suggested Citation

Lambertini, Luisa and Azariadis, Costas, Endogenous Debt Constraints in Lifecycle Economies (September 13, 2002). The Review of Economic Studies, Vol 70, Issue 3, pp. 461-487, 2003. Available at SSRN: https://ssrn.com/abstract=1444307

Luisa Lambertini (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

Costas Azariadis

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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