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Bubbles and Self-Enforcing Debt
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 ag...
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| Published in: | Econometrica 2009-07, Vol.77 (4), p.1137-1164 |
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| Main Authors: | , |
| Format: | Article |
| Language: | English |
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| cited_by | cdi_FETCH-LOGICAL-c5791-b4da0903607202860ee6f6d8c7f60f486c37ce2f1bbf8a402f99e3bd3cc685ad3 |
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| container_end_page | 1164 |
| container_issue | 4 |
| container_start_page | 1137 |
| container_title | Econometrica |
| container_volume | 77 |
| creator | Hellwig, Christian Lorenzoni, Guido |
| description | 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. |
| doi_str_mv | 10.3982/ECTA6754 |
| format | article |
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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.</description><identifier>ISSN: 0012-9682</identifier><identifier>EISSN: 1468-0262</identifier><identifier>DOI: 10.3982/ECTA6754</identifier><identifier>CODEN: ECMTA7</identifier><language>eng</language><publisher>Oxford, UK: Blackwell Publishing Ltd</publisher><subject>Allocations ; Applications ; Biology, psychology, social sciences ; Commitments ; Debt ; Debt limits ; Debt repayment ; Economic bubbles ; Economic theory ; Economics ; Endowments ; Equilibrium ; Equilibrium models ; Equilibrium theory ; Exact sciences and technology ; External debt ; General economic equilibrium ; Insurance, economics, finance ; Interest rates ; Loan defaults ; Mathematics ; Probability and statistics ; Probability theory and stochastic processes ; Public debt ; rational bubbles ; Risk sharing ; Sciences and techniques of general use ; Self-enforcing debt ; sovereign debt ; Special processes (renewal theory, markov renewal processes, semi-markov processes, statistical mechanics type models, applications) ; Statistics ; Studies ; Sustainable economies</subject><ispartof>Econometrica, 2009-07, Vol.77 (4), p.1137-1164</ispartof><rights>Copyright 2009 The Econometric Society</rights><rights>2009 The Econometric Society</rights><rights>2009 INIST-CNRS</rights><rights>Copyright Blackwell Publishing Ltd. Jul 2009</rights><lds50>peer_reviewed</lds50><oa>free_for_read</oa><woscitedreferencessubscribed>false</woscitedreferencessubscribed><citedby>FETCH-LOGICAL-c5791-b4da0903607202860ee6f6d8c7f60f486c37ce2f1bbf8a402f99e3bd3cc685ad3</citedby></display><links><openurl>$$Topenurl_article</openurl><openurlfulltext>$$Topenurlfull_article</openurlfulltext><thumbnail>$$Tsyndetics_thumb_exl</thumbnail><linktopdf>$$Uhttps://onlinelibrary.wiley.com/doi/pdf/10.3982%2FECTA6754$$EPDF$$P50$$Gwiley$$H</linktopdf><linktohtml>$$Uhttps://onlinelibrary.wiley.com/doi/full/10.3982%2FECTA6754$$EHTML$$P50$$Gwiley$$H</linktohtml><link.rule.ids>315,786,790,27957,27958,33258,33259,50923,51032,58593,58826</link.rule.ids><backlink>$$Uhttp://pascal-francis.inist.fr/vibad/index.php?action=getRecordDetail&idt=21810456$$DView record in Pascal Francis$$Hfree_for_read</backlink></links><search><creatorcontrib>Hellwig, Christian</creatorcontrib><creatorcontrib>Lorenzoni, Guido</creatorcontrib><title>Bubbles and Self-Enforcing Debt</title><title>Econometrica</title><description>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.</description><subject>Allocations</subject><subject>Applications</subject><subject>Biology, psychology, social sciences</subject><subject>Commitments</subject><subject>Debt</subject><subject>Debt limits</subject><subject>Debt repayment</subject><subject>Economic bubbles</subject><subject>Economic theory</subject><subject>Economics</subject><subject>Endowments</subject><subject>Equilibrium</subject><subject>Equilibrium models</subject><subject>Equilibrium theory</subject><subject>Exact sciences and technology</subject><subject>External debt</subject><subject>General economic equilibrium</subject><subject>Insurance, economics, finance</subject><subject>Interest rates</subject><subject>Loan defaults</subject><subject>Mathematics</subject><subject>Probability and statistics</subject><subject>Probability theory and stochastic processes</subject><subject>Public debt</subject><subject>rational bubbles</subject><subject>Risk sharing</subject><subject>Sciences and techniques of general use</subject><subject>Self-enforcing debt</subject><subject>sovereign debt</subject><subject>Special processes (renewal theory, markov renewal processes, semi-markov processes, statistical mechanics type models, applications)</subject><subject>Statistics</subject><subject>Studies</subject><subject>Sustainable economies</subject><issn>0012-9682</issn><issn>1468-0262</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2009</creationdate><recordtype>article</recordtype><sourceid>8BJ</sourceid><recordid>eNqF0NFKwzAUBuAgCs4p-ALiEBRvqidJm6SXc5tTHPPCieBNSNNEOrt2Jhu6tzdzc4ggQiCBfPw5-RE6xHBBU0Eue51Rm_Ek3kINHDMRAWFkGzUAMIlSJsgu2vN-DABJWA10fDXPstL4lqry1oMpbdSrbO10Ub20uiab7aMdq0pvDtZ7Ez1e90adm2hw37_ttAeRTniKoyzOFaRAGXACRDAwhlmWC80tAxsLpinXhlicZVaoGIhNU0OznGrNRKJy2kRnq9ypq9_mxs_kpPDalKWqTD33knIcpgf4F4bngWLBAzz5Bcf13FXhE8FQkWJOWUDnK6Rd7b0zVk5dMVFuITHIZZ_yu89AT9d5ymtVWqcqXfiNJ1hgiJNlZLRy70VpFn_mfR3SBAd_tPJjP6vdxoeOGBU_8wo_Mx-be-VeJeOUJ_Jp2JfDu1G3TzrPMqafo3aXkQ</recordid><startdate>200907</startdate><enddate>200907</enddate><creator>Hellwig, Christian</creator><creator>Lorenzoni, Guido</creator><general>Blackwell Publishing Ltd</general><general>Econometric Society</general><general>Wiley-Blackwell</general><scope>BSCLL</scope><scope>IQODW</scope><scope>AAYXX</scope><scope>CITATION</scope><scope>8BJ</scope><scope>FQK</scope><scope>JBE</scope><scope>7U1</scope><scope>7U2</scope><scope>C1K</scope></search><sort><creationdate>200907</creationdate><title>Bubbles and Self-Enforcing Debt</title><author>Hellwig, Christian ; Lorenzoni, Guido</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c5791-b4da0903607202860ee6f6d8c7f60f486c37ce2f1bbf8a402f99e3bd3cc685ad3</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2009</creationdate><topic>Allocations</topic><topic>Applications</topic><topic>Biology, psychology, social sciences</topic><topic>Commitments</topic><topic>Debt</topic><topic>Debt limits</topic><topic>Debt repayment</topic><topic>Economic bubbles</topic><topic>Economic theory</topic><topic>Economics</topic><topic>Endowments</topic><topic>Equilibrium</topic><topic>Equilibrium models</topic><topic>Equilibrium theory</topic><topic>Exact sciences and technology</topic><topic>External debt</topic><topic>General economic equilibrium</topic><topic>Insurance, economics, finance</topic><topic>Interest rates</topic><topic>Loan defaults</topic><topic>Mathematics</topic><topic>Probability and statistics</topic><topic>Probability theory and stochastic processes</topic><topic>Public debt</topic><topic>rational bubbles</topic><topic>Risk sharing</topic><topic>Sciences and techniques of general use</topic><topic>Self-enforcing debt</topic><topic>sovereign debt</topic><topic>Special processes (renewal theory, markov renewal processes, semi-markov processes, statistical mechanics type models, applications)</topic><topic>Statistics</topic><topic>Studies</topic><topic>Sustainable economies</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>Hellwig, Christian</creatorcontrib><creatorcontrib>Lorenzoni, Guido</creatorcontrib><collection>Istex</collection><collection>Pascal-Francis</collection><collection>CrossRef</collection><collection>International Bibliography of the Social Sciences (IBSS)</collection><collection>International Bibliography of the Social Sciences</collection><collection>International Bibliography of the Social Sciences</collection><collection>Risk Abstracts</collection><collection>Safety Science and Risk</collection><collection>Environmental Sciences and Pollution Management</collection><jtitle>Econometrica</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>Hellwig, Christian</au><au>Lorenzoni, Guido</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>Bubbles and Self-Enforcing Debt</atitle><jtitle>Econometrica</jtitle><date>2009-07</date><risdate>2009</risdate><volume>77</volume><issue>4</issue><spage>1137</spage><epage>1164</epage><pages>1137-1164</pages><issn>0012-9682</issn><eissn>1468-0262</eissn><coden>ECMTA7</coden><notes>ArticleID:ECTA951</notes><notes>ark:/67375/WNG-NKTDG2CZ-4</notes><notes>istex:E15FEE62A865148B9E145956ADDAC307619ADA46</notes><notes>We thank for useful comments a co‐editor, three anonymous referees, Marios Angeletos, Andy Atkeson, V. V. Chari, Hal Cole, Veronica Guerrieri, Nobu Kiyotaki, Narayana Kocherlakota, John Moore, Fabrizio Perri, Balázs Szentes, Aleh Tsyvinski, Iván Werning, Mark Wright, and seminar audiences at the Columbia, European University Institute (Florence), Mannheim, Maryland, Max Planck Institute (Bonn), NYU, Notre Dame, Penn State, Pompeu Fabra, Stanford, Texas (Austin), UCLA, UCSB, the Federal Reserve Banks of Chicago, Dallas, and Minneapolis, the 2002 SED Meetings (New York), the 2002 Stanford Summer Institute in Theoretical Economics, and the 2003 Bundesbank/CFS/FIC Conference on Liquidity and Financial Instability (Eltville, Germany) for feedback. Lorenzoni thanks the Research Department of the Federal Reserve Bank of Minneapolis for hospitality during part of this research. Hellwig gratefully acknowledges financial support through the ESRC. All remaining errors and omissions are our own.</notes><notes>ObjectType-Article-2</notes><notes>SourceType-Scholarly Journals-1</notes><notes>ObjectType-Feature-1</notes><notes>content type line 23</notes><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.</abstract><cop>Oxford, UK</cop><pub>Blackwell Publishing Ltd</pub><doi>10.3982/ECTA6754</doi><tpages>28</tpages><oa>free_for_read</oa></addata></record> |
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| identifier | ISSN: 0012-9682 |
| ispartof | Econometrica, 2009-07, Vol.77 (4), p.1137-1164 |
| issn | 0012-9682 1468-0262 |
| language | eng |
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| source | Wiley-Blackwell Journals; International Bibliography of the Social Sciences (IBSS); EBSCOhost Econlit with Full Text; JSTOR Archival Journals and Primary Sources Collection |
| subjects | Allocations Applications Biology, psychology, social sciences Commitments Debt Debt limits Debt repayment Economic bubbles Economic theory Economics Endowments Equilibrium Equilibrium models Equilibrium theory Exact sciences and technology External debt General economic equilibrium Insurance, economics, finance Interest rates Loan defaults Mathematics Probability and statistics Probability theory and stochastic processes Public debt rational bubbles Risk sharing Sciences and techniques of general use Self-enforcing debt sovereign debt Special processes (renewal theory, markov renewal processes, semi-markov processes, statistical mechanics type models, applications) Statistics Studies Sustainable economies |
| title | Bubbles and Self-Enforcing Debt |
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