Credit Markets, Limited Commitment, and Government Debt

FRB of St. Louis Working Paper No. 2014-010A

41 Pages Posted: 30 Mar 2014

See all articles by Francesca Carapella

Francesca Carapella

Board of Governors of the Federal Reserve System

Stephen D. Williamson

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: February 24, 2014

Abstract

A dynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers’ incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not.

Keywords: credit, government debt, limited commitment

JEL Classification: E4, E5, E6

Suggested Citation

Carapella, Francesca and Williamson, Stephen D., Credit Markets, Limited Commitment, and Government Debt (February 24, 2014). FRB of St. Louis Working Paper No. 2014-010A, Available at SSRN: https://ssrn.com/abstract=2417462 or http://dx.doi.org/10.2139/ssrn.2417462

Francesca Carapella

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Stephen D. Williamson (Contact Author)

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

P.O. Box 442
St. Louis, MO 63166-0442
United States

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