Financial constraints, endogenous markups, and self-fulfilling equilibria

Jess Benhabib, Pengfei Wang

    Research output: Contribution to journalArticlepeer-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 languageEnglish (US)
    Pages (from-to)789-805
    Number of pages17
    JournalJournal of Monetary Economics
    Volume60
    Issue number7
    DOIs
    StatePublished - Oct 2013

    Keywords

    • Endogenous markups
    • Financial constraints
    • Indeterminacy
    • Self-fulfilling equilibria

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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