Multiple Equilibria in Open Economies with Collateral Constraints

2020 ◽  
Author(s):  
Stephanie Schmitt-Grohé ◽  
Martín Uribe
Keyword(s):  
Open Economy ◽  
Financial Crises ◽  
Multiple Equilibria ◽  
Infinite Horizon ◽  
Open Economies ◽  
Precautionary Savings ◽  
Related Literature ◽  
Collateral Constraints ◽  
Present Context ◽  
Open Economy Models

Abstract This article establishes the existence of multiple equilibria in infinite-horizon open economy models in which the value of tradable and non-tradable endowments serves as collateral. In this environment, the economy displays self-fulfilling financial crises in which pessimistic views about the value of collateral induce agents to deleverage. 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.

scholarly journals Stationarity-Inducing Techniques in Small Open Economy Models with Collateral Constraints

2020 ◽  
Author(s):  
Vasiliki Dimakopoulou
Keyword(s):  
Interest Rate ◽  
Open Economy ◽  
Small Open Economy ◽  
Discount Factor ◽  
Credit Constraint ◽  
Economy Model ◽  
Collateral Constraints ◽  
Equilibrium Dynamics ◽  
Interest Rate Model ◽  
Open Economy Models

AbstractI show that the alternative stationarity-inducing techniques that have been used to “close” the standard small open economy model (like an endogenous discount factor and a debt-elastic interest rate premium) have different implications for the equilibrium dynamics once I add a commonly-used collateral-type financial constraint. Given this non-equivalence, my results further show that a small open economy model with a credit constraint that embodies an endogenous discount factor is superior to the debt-elastic interest rate model when one tries to match this kind of models to the data.

Financial openness, bank capital flows, and the effectiveness of macroprudential policies

2021 ◽  
pp. 1-32
Author(s):  
Hao Jin ◽  
Chen Xiong
Keyword(s):  
Open Economy ◽  
Capital Flows ◽  
Open Economies ◽  
Small Open Economy ◽  
Empirical Support ◽  
Bank Capital ◽  
Macroprudential Policy ◽  
Funding Sources ◽  
Macroprudential Policies ◽  
Dynamic Stochastic

Abstract This paper quantitatively examines the macroeconomic and welfare effects of macroprudential policies in open economies. We develop a small open economy dynamic stochastic general equilibrium (DSGE) model, where banks choose their funding sources (domestic vs. foreign deposits) and are subject to financial constraints. Our model predicts that banks reduce leverage in response to a macroprudential policy tightening, but increasingly rely on foreign funding. This endogenous shifts of funding composition significantly undermine the stabilizing effect and welfare gains of macroprudential policies. Our results also suggest macroprudential policies are less effective in financially more open economies, and optimal policy should take capital flows into consideration. Finally, we find empirical support for the model predictions in a group of developing and emerging economies.

scholarly journals Approximately Right?: Global v. Local Methods for Open-Economy Models with Incomplete Markets

2020 ◽  
Vol 2020 (006) ◽  
Author(s):  
Oliver de Groot ◽  
◽  
C. Bora Durdu ◽  
Enrique G. Mendoza ◽  
◽  
...  
Keyword(s):  
Incomplete Markets ◽  
Open Economy ◽  
Local Methods ◽  
Open Economy Models

After the Panic: Are Financial Crises Demand or Supply Shocks? Evidence from International Trade

2020 ◽  
Vol 2 (4) ◽  
pp. 509-526 ◽  
Author(s):  
Felipe Benguria ◽  
Alan M. Taylor
Keyword(s):  
Open Economy ◽  
Financial Crises ◽  
Aggregate Demand ◽  
Small Open Economy ◽  
Supply Side ◽  
Supply Shocks ◽  
Crisis Events ◽  
Empirical Tests ◽  
Negative Shock ◽  
Research And Policy

Are financial crises a negative shock to aggregate demand or supply? This is a fundamental question for research and policy making. Arguments for stimulus usually presume demand-side shortfalls; arguments for tax cuts or structural reform look to the supply side. Resolving the question requires models with both mechanisms, and empirical tests to tell them apart. We develop a small open economy model, where a country is subject to deleveraging shocks that impose binding credit constraints on households and/or firms. These financial crisis events leave distinct statistical signatures in the time series record that divide sharply between each type of shock. Empirical analysis reveals a clear picture: after financial crises the dominant pattern is that imports contract, exports hold steady or even rise, and the real exchange rate depreciates. History shows financial crises are predominantly a negative shock to demand. (JEL F14, F31, F41, G01, N10, N20, N70)

Sign in / Sign up

Export Citation Format

Share Document