Nearly seven years have passed since the last recession ended in November 2001.That recession was characterized by an unwinding of excess business investment in the aftermath of a burst U.S. stock market bubble (see Lansing 2003a). During the early years of the recovery, an accommodative interest rate environment provided stimulus to the housing market. To keep initial monthly payments affordable for the large influx of new and often credit-impaired homebuyers, the lending industry marketed a range of "exotic" mortgage products, for example, loans requiring no down payment or documentation of income, monthly payments for interest-only or less, and adjustable rate mortgages with low introductory "teaser" rates that reset higher over time. House prices rose faster in areas where exotic mortgages were more prevalent (see Tal 2006), suggesting, ironically, that the new lending products may have actually harmed affordability by fueling the price run-up.

This paper explores the role of portfolio constraints in generating multiplicity of equilibrium. We present a simple financial market economy with two goods and two households, households who face constraints on their ability to take unbounded positions in risky stocks. Absent such constraints, equilibrium allocation is unique and is Pareto efficient. With one portfolio constraint in place, the efficient equilibrium is still possible; however, additional inefficient equilibria in which the constraint is binding may emerge. We show further that with portfolio constraints cum incomplete markets, there may be a continuum of equilibria; adding incomplete markets may lead to real indeterminacy.JEL Classifications: G12, D52

This paper explores the role of portfolio constraints in generating multiplicity of equilibrium. We present a simple financial market economy with two goods and two households, households who face constraints on their ability to take unbounded positions in risky stocks. Absent such constraints, equilibrium allocation is unique and is Pareto efficient. With one portfolio constraint in place, the efficient equilibrium is still possible; however, additional inefficient equilibria in which the constraint is binding may emerge. We show further that with portfolio constraints cum incomplete markets, there may be a continuum of equilibria; adding incomplete markets may lead to real indeterminacy.

This paper explores the role of portfolio constraints in generating multiplicity of equilibrium. We present a simple financial market economy with two goods and two households, households who face constraints on their ability to take unbounded positions in risky stocks. Absent such constraints, equilibrium allocation is unique and is Pareto efficient. With one portfolio constraint in place, the efficient equilibrium is still possible; however, additional inefficient equilibria in which the constraint is binding may emerge. We show further that with portfolio constraints cum incomplete markets, there may be a continuum of equilibria; adding incomplete markets may lead to real indeterminacy.

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