Endogenous Credit Cycles

38 Pages Posted: 14 Oct 2011 Last revised: 7 May 2021

See all articles by Chao Gu

Chao Gu

University of Missouri - Columbia

Randall Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: October 2011

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.

Suggested Citation

Gu, Chao and Wright, Randall D., Endogenous Credit Cycles (October 2011). NBER Working Paper No. w17510, Available at SSRN: https://ssrn.com/abstract=1944008

Chao Gu (Contact Author)

University of Missouri - Columbia ( email )

Columbia, MO 65203
United States

Randall D. Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-3860 (Phone)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
23
Abstract Views
633
PlumX Metrics