Multiple Equilibria in Open Economy Models with Collateral Constraints: Overborrowing Revisited

31 Pages Posted: 14 Nov 2016

See all articles by Stephanie Schmitt-Grohé

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2016

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: capital controls., Collateral constraints, Financial crises, overborrowing, Pecuniary externalities, underborrowing

JEL Classification: E44, F41, G01, H23

Suggested Citation

Schmitt-Grohe, Stephanie and Uribe, Martin, Multiple Equilibria in Open Economy Models with Collateral Constraints: Overborrowing Revisited (November 2016). CEPR Discussion Paper No. DP11623, Available at SSRN: https://ssrn.com/abstract=2869077

Stephanie Schmitt-Grohe (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

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Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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