DP14248 Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints

Author(s): Stephanie Schmitt-Grohé, Martin Uribe
Publication Date: December 2019
Keyword(s): capital controls, Chaos, Credit Booms, Deleveraging, Deterministic cycles, flow collateral constraints, Pecuniary externality
JEL(s): E32, F38, F41, H23
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14248

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.