Endogenous Debt Constraints in Lifecycle Economies

We characterize competitive equilibria with perfect foresight in a deterministic, three-period pure-exchange overlapping generations economy with perfect information and no commitment to loan contracts. Commitment is replaced by an enforcement mechanism that excludes defaulters from asset markets for one period. For hump- shaped endowment profiles, young individuals face endogenous debt constraints that ration current consumption. Changes in current and future yields affect these constraints, inducing an additional income effect on rationed household demand that makes current and future consumption complements. This mechanism can lead to multiple steady states, persistent indeterminacy and regime switching. We show that sensitivity to shocks and complex dynamic behavior are consistent with endogenous debt limits but not with exogenous liquidity constraints.


Published in:
Review of Economic Studies, 70, 461-487
Year:
2003
Publisher:
Wiley-Blackwell
ISSN:
0034-6527
Note:
JEL Classification: E32, D91, D52
Laboratories:




 Record created 2007-07-16, last modified 2018-03-17


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