Discussion paper

DP14248 Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints

This paper establishes the existence of deterministic cycles in infinite-horizon open economy models with a flow collateral constraint. It shows that for plausible parameter configurations, the economy has a unique equilibrium exhibiting deterministic cycles in which periods of debt growth are followed by periods of debt deleveraging. In particular, three-period cycles exist, which implies by the Li-Yorke Theorem the presence of cycles of any periodicity and chaos. The paper also shows that deterministic cycles are absent in the Ramsey optimal allocation providing a justification for macroprudential policies even in the absence of uncertainty.

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Citation

Schmitt-Grohé, S and M Uribe (eds) (2019), “DP14248 Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints”, CEPR Press Discussion Paper No. 14248. https://new.cepr.org/publications/dp14248