Financial constraints, endogenous markups, and self-fulfilling equilibria

Self-fulfilling equilibria and indeterminacy can easily arise in a simple financial accelerator model with reasonable parameter calibrations and without increasing returns in production. A key feature for generating indeterminacy in our model is the countercyclical markup due to the procyclical loan...

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Bibliographic Details
Published in:Journal of monetary economics 2013-10, Vol.60 (7), p.789-805
Main Authors: Benhabib, Jess, Wang, Pengfei
Format: Article
Language:English
Subjects:
Business cycles
Capital returns
Correlation analysis
Demand shock
Economic models
Economic theory
Endogenous markups
Financial constraints
Growth rate
Indeterminacy
Loans
Output
Output rate
Self-fulfilling equilibria
Simulation
Studies
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Summary:Self-fulfilling equilibria and indeterminacy can easily arise in a simple financial accelerator model with reasonable parameter calibrations and without increasing returns in production. A key feature for generating indeterminacy in our model is the countercyclical markup due to the procyclical loan-to-output ratio. We illustrate, via simulations, that our financial accelerator model can generate rich business cycle dynamics, including hump-shaped output in response to demand shocks as well as autocorrelation in output growth rates. •Collateral constraints lead to self-fulfilling fluctuations.•Favorable expectations can relax borrowing constraints, and firms can expand output.•This bids up factor prices, and labor supply rises, fulfilling initial expectations.•Self-fulfilling movements occur with realistic parameters compatible with US data.•Simulated moments and impulse responses match the US data reasonably well.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2013.06.004