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SUNSPOTS AND CREDIT FRICTIONS

Published online by Cambridge University Press:  28 September 2012

Sharon G. Harrison  and
Mark Weder
Sharon G. Harrison*
Affiliation:
Barnard College, Columbia University
Mark Weder
Affiliation:
University of Adelaide
*
Address correspondence to: Sharon G. Harrison, Department of Economics, Barnard College, Columbia University, 3009 Broadway, New York, NY 10027, USA; e-mail: sh411@columbia.edu.
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Abstract

We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumer's choice of leisure. Unlike this model without a collateral constraint, we find that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulfilling expectations. This is the case for more realistic parameterizations than in previous, similar models without these features.

Keywords

Business CyclesCredit MarketsCollateral ConstraintSunspots
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 5 , July 2013 , pp. 1055 - 1069
Copyright
Copyright © Cambridge University Press 2012 

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