Credit Markets, Limited Commitment, and Government Debt

Carapella, Francesca; Williamson, Stephen D.

doi:10.1093/restud/rdv006

Cited by 18 publications

(17 citation statements)

References 23 publications

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“…Indeed, by (10), y t is determined by d t , and hence (9) can be viewed as an inequality that involves fd t g 1 t=0 as the only endogenous variables. Without the danger of confusion, we also call a sequence of debt limits, fd t g 1 t=0 , a credit equilibrium if it satis…es (9) and (10). The next corollary provides a su¢ cient condition for a credit equilibrium in recursive form.…”

Section: Environmentmentioning

confidence: 98%

“…6 See Rocheteau and Nosal (2017, Chapter 2) for an overview of pure credit economies in the Lagos and Wright (2005) environment. "Not-too-tight" solvency constraints have been extensively used in the New Monetarist literature to study, for example, the link between aggregate unemployment and unsecured credit (Bethune et al, 2015), the interaction between private and public debt (Carapella and Williamson, 2015), and the coexistence of money and credit (Lotz and Zhang, 2016, and Araujo and Hu, 2017). 7 Repeated games where agents are matched bilaterally and at random and change trading partners over time are studied in Kandori (1992) and Ellison (1994).…”

Section: Environmentmentioning

confidence: 99%

“…The utility of consuming z 2 R units of the numéraire good is z, where z < 0 is interpreted as production. 10 Agents'common discount factor across periods is 1=(1 + r) 2 (0; 1).…”

Section: Environmentmentioning

confidence: 99%

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Indeterminacy in credit economies

Bethune

Hu²,

Rocheteau

2018

Journal of Economic Theory

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We characterize the equilibrium set of a two-good, pure-credit economy with limited commitment, under both pairwise and centralized meetings. We show that the set of equilibria derived under "not-tootight" solvency constraints (Alvarez and Jermann, 2000) commonly used in the literature is of measure zero in the whole set of Perfect Bayesian Equilibria. There exist a continuum of stationary equilibria, a continuum of endogenous credit cycles of any periodicity, and a continuum of sunspot equilibria, irrespective of the assumed trading mechanism. Equilibria featuring "too-tight" solvency constraints can generate growing credit limits over time, periodic credit shutdowns, and heterogeneous debt limits across ex-ante identical borrowers. Moreover, we provide examples of credit cycles that dominate, from a social welfare point of view, all equilibria with "not-too-tight" solvency constraints.

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Section: Environmentmentioning

confidence: 98%

Section: Environmentmentioning

confidence: 99%

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Indeterminacy in credit economies

Bethune

Hu²,

Rocheteau

2018

Journal of Economic Theory

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“…Kehoe and Levine (1993) and Azariadis and Kass (2013) study the condition under which the first best allocation is obtained in an economy with limited commitment. Azariadis (2014) and Carapella and Williamson (2015) study the role of preventive policies and government debt, respectively, in credit markets. Azariadis and Kass (2007) derive asset price fluctuation, Hellwig and Lorenzoni (2009) show that a model with borrowing constraints may generate bubbles, and Gu et al (2013) show endogenous credit cycles in models of credit with limited commitment.…”

Section: Introductionmentioning

confidence: 99%

Cryptocurrency, Delivery Lag, and Double Spending History

Kang

2019

SSRN Journal

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We develop a general equilibrium model of cryptocurrency to study the optimal design of a cryptocurrency system. Agents trade cryptocurrency using digital wallets, and the cryptocurrency system provides verification of a digital wallet's history of double spending attempts. Delaying the delivery of goods until payment information is confirmed in the blockchain prevents double spending. However, double spending can be prevented without a delivery lag under some conditions if a wallet has a good reputation in terms of its history of double spending attempts. In particular, as the difficulty of mining work rises, the incentive to engage in double spending with a good wallet decreases. We study the optimal design of the cryptocurrency system in terms of the difficulty of mining work and the supply of cryptocurrency and evaluate the welfare gain that would be captured if the current Bitcoin system adopted the optimal cryptocurrency system.

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“…However, none of these papers considers the possibility that the lender can visit a secondary asset market in order to sell off the collateral, which is the central idea in our model. Moreover, Carapella and Williamson (2012) study a model of collateral, and they focus on the incentives of borrowers to default (in our analysis this is exogenous). They show that government debt can act to make defaulting on credit contracts more costly, thus relaxing incentive constraints and increasing transactions and welfare.…”

Section: Introductionmentioning

confidence: 99%

Over-the-counter trade and the value of assets as collateral

Geromichalos

Lee

et al. 2015

Econ Theory

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We study asset pricing within a general equilibrium model where unsecured credit is ruled out, and a real asset helps agents carry out mutually beneficial transactions by serving as collateral. A unique feature of our model is that the agent who provides the loan might have a low valu-ation for the collateral asset. Nevertheless, the lender rationally chooses to accept the collateral because she can access a secondary asset market where she can sell the asset. Following a recent strand of the finance literature, based on the influential work of Duffie, Gˆarleanu, and Pedersen (2005), we model this secondary asset market as an over-the-counter market characterized by search and bargaining frictions. We study how the asset's property to serve as collateral affects its equilibrium price, and how the asset price and the economy's welfare are affected by the degree of liquidity in the secondary asset market.We study asset pricing within a general equilibrium model where unsecured credit is ruled out, and a real asset helps agents carry out mutually beneficial transactions by serving as collateral. A unique feature of our model is that the agent who provides the loan might have a low valuation for the collateral asset. Nevertheless, the lender rationally chooses to accept the collateral because she can access a secondary asset market where she can sell the asset. Following a recent strand of the finance literature, based on the influential work of Duffie, Gârleanu, and Pedersen (2005), we model this secondary asset market as an over-the-counter (OTC) market characterized by search and bargaining frictions. We study how the asset's property to serve as collateral affects its equilibrium price, and how the asset price and the economy's welfare are affected by the degree of liquidity in the secondary asset market.

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Credit Markets, Limited Commitment, and Government Debt

Cited by 18 publications

References 23 publications

Indeterminacy in credit economies

Indeterminacy in credit economies

Cryptocurrency, Delivery Lag, and Double Spending History

Over-the-counter trade and the value of assets as collateral

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