NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Adjustment to Small, Large, and Sunspot Shocks in Open Economies With Stock Collateral Constraints

Stephanie Schmitt-Grohé, Martín Uribe

NBER Working Paper No. 22971
Issued in December 2016
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics

This paper characterizes analytically the adjustment of an open economy with a stock collateral constraint to fundamental and nonfundamental shocks. In the model, external borrowing is limited by the value of physical capital. Three results are established: (1) Adjustment to external shocks is nonlinear. In response to small negative output shocks, the economy adjusts as prescribed by the intertemporal approach to the current account, with increases in debt, deficits in the trade and current account balances, and no significant movement in the price of collateral. By contrast, in response to large negative output shocks the economy experiences a sudden stop with debt deleveraging, trade and current account reversals, and a Fisherian deflation of asset prices. (2) Generically, weak fundamentals (low output and high external debt) give rise to multiple equilibria. (3) In this case, the economy is prone to self-fulfilling sudden stops driven by downward revisions of expectations about the value of collateral.

download in pdf format
   (229 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22971

Published: Stephanie Schmitt-Grohé & Martín Uribe, 2017. "Adjustment to small, large, and sunspot shocks in open economies with stock collateral constraints," Ensayos sobre Política Económica, vol 35(82), pages 2-9.

Users who downloaded this paper also downloaded* these:
Casas, Diez, Gopinath, and Gourinchas w22943 Dominant Currency Paradigm
Fernández, Schmitt-Grohé, and Uribe w22833 World Shocks, World Prices, and Business Cycles: An Empirical Investigation
Blanchard, Ostry, Ghosh, and Chamon w21619 Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence
Gabaix w22954 A Behavioral New Keynesian Model
Li, He, Liu, Fraumeni, and Zheng w22906 Regional Distribution and Dynamics of Human Capital in China 1985-2014: Education, Urbanization, and Aging of the Population
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us