Bubbles and Self-Enforcing Debt
Name
BSED.pdf
Description
article
Size
290.85 KB
Format
Adobe PDF
Checksum (MD5)
a88f5d7ecf342b200da066e2570bf476
Author(s)
Hellwig, Christian
Lorenzoni, Guido
Date Issued
July 2009
Journal
Econometrica : journal of the Econometric Society
Publisher
Econometric Society
Citation
Hellwig, Christian, and Guido Lorenzoni. “Bubbles and Self-Enforcing Debt.” Econometrica 77.4 (2009): 1137-1164.
Version
Author's final manuscript
Abstract
We characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods. First, we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period. Second, we provide an equivalence result, whereby the resulting set of equilibrium allocations with self-enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles. In contrast to the classic result by Bulow and Rogoff (1989a), positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Attribution-Noncommercial-Share Alike 3.0 Unported
Persistent DSpace Link
DOI of Published Version
http://dx.doi.org/10.3982/ecta6754
