Discussion Paper Details

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Title: Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints

Author(s): Stephanie Schmitt-Grohé and Martin Uribe

Publication Date: December 2019

Keyword(s): capital controls, Chaos, Credit Booms, Deleveraging, Deterministic cycles, flow collateral constraints and Pecuniary externality

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: 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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Bibliographic Reference

Schmitt-Grohé, S and Uribe, M. 2019. 'Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints'. London, Centre for Economic Policy Research.