DP7477 Indeterminacy of Competitive Equilibrium with Risk of Default

Author(s): Gaetano Bloise, Pietro Reichlin, Mario Tirelli
Publication Date: September 2009
Keyword(s): Debt Constraints, Default, Indeterminacy
JEL(s): D50, D52, D61, E44, G13
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7477

We prove indeterminacy of competitive equilibrium in sequential economies, where limited commitment requires the endogenous determination of solvency constraints preventing debt repudiation (Alvarez and Jermann (2000)). In particular, we show that, for any arbitrary value of social welfare in between autarchy and (constrained) optimality, there exists an equilibrium attaining that value. Our method consists in restoring Welfare Theorems for a weak notion of (constrained) optimality. The latter, inspired by Malinvaud (1953), corresponds to the absence of Pareto improving feasible redistributions over finite (though indefinite) horizons.