TY  - JOUR
AU  - Hellwig,Christian
AU  - Lorenzoni,Guido
TI  - Bubbles and Self-Enforcing Debt
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12614
PY  - 2006
Y2  - October 2006
UR  - http://www.nber.org/papers/w12614
L1  - http://www.nber.org/papers/w12614.pdf
N1  - Author contact info:
Christian Hellwig
Toulouse School of Economics
Manufacture de Tabacs,
21 Allées de Brienne,
31000 Toulouse
Tel: +33 5 61 12 85 93
Fax: +33 5 61 12 86 37
E-Mail: christian.hellwig@tse-fr.eu

Guido Lorenzoni
MIT Department of Economics
E52-251C
50 Memorial Drive
Cambridge, MA 02142-1347
Tel: 617/253-4836
Fax: 617/253-1330
E-Mail: glorenzo@mit.edu
AB  - We characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods. First, we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period. Second, we provide an equivalence result, whereby the resulting set of equilibrium allocations with self-enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles; for the latter, there exist well known existence and characterization results. In contrast to the classic result by Bulow and Rogoff (AER 1989), positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives.
ER  -