Financial constraints,endogenous markups,and self-fulfilling equilibria |
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Authors: | Jess Benhabib Pengfei Wang |
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Institution: | 1. Department of Economics, New York University, 269 Mercer Street, 7th Floor, New York, NY 10003, United States;2. Department of Economics, The Hong Kong University of Science and Technology, Hong Kong |
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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. |
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Keywords: | Financial constraints Endogenous markups Self-fulfilling equilibria Indeterminacy |
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