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Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints

Stephanie Schmitt-Grohé, Martín Uribe

NBER Working Paper No. 26613
Issued in January 2020
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics

This paper establishes the existence of deterministic cycles in infinite-horizon open economy models with a flow collateral constraint. It shows that for plausible parameter configurations, the economy has a unique equilibrium exhibiting deterministic cycles in which periods of debt growth are followed by periods of debt deleveraging. In particular, three-period cycles exist, which implies by the Li-Yorke Theorem the presence of cycles of any periodicity and chaos. The paper also shows that deterministic cycles are absent in the Ramsey optimal allocation providing a justification for macroprudential policies even in the absence of uncertainty.

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Document Object Identifier (DOI): 10.3386/w26613

 
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