Financial constraints, endogenous markups, and self-fulfilling equilibria

Jess Benhabib; Pengfei Wang

doi:10.1016/j.jmoneco.2013.06.004

Financial constraints, endogenous markups, and self-fulfilling equilibria

Jess Benhabib, Pengfei Wang

Research output: Contribution to journal › Article › peer-review

Abstract

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.

Original language	English (US)
Pages (from-to)	789-805
Number of pages	17
Journal	Journal of Monetary Economics
Volume	60
Issue number	7
DOIs	https://doi.org/10.1016/j.jmoneco.2013.06.004
State	Published - Oct 2013

Keywords

Endogenous markups
Financial constraints
Indeterminacy
Self-fulfilling equilibria

ASJC Scopus subject areas

Finance
Economics and Econometrics

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title = "Financial constraints, endogenous markups, and self-fulfilling equilibria",

abstract = "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.",

keywords = "Endogenous markups, Financial constraints, Indeterminacy, Self-fulfilling equilibria",

author = "Jess Benhabib and Pengfei Wang",

note = "Funding Information: The authors thank the editor and referee for helpful comments. Pengfei Wang acknowledges financial support from Hong Kong Research Grant Council (Project 645811 ). ",

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AB - 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.

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KW - Self-fulfilling equilibria

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