This paper shows that the quantitative predictions of a DSGE model with an endogenous collateral constraint are consistent with key features of the emerging markets’ Sudden Stops. Business cycle dynamics produce periods of expansion during which the ratio of debt to asset values raises enough to trigger the constraint. This sets in motion a deflation of Tobin’s Q driven by Irving Fisher’s debt-...

This study aimed to examine the effects of monetary policy on macroeconomic variables with regard to the collateral constraint. For this purpose, a dynamic stochastic general equilibrium (DSGE) was developed for Iran’s economic status. Two scenarios were considered as to account for the behavior of the central bank. In the first scenario, the monetary rule is modeled according to the GDP gap an...

We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income e¤ect on the consumer’s choice of leisure. Unlike this model without a collateral constraint, we …nd that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-ful…lling expectations. This is the ca...

We study a dynamic stochastic general equilibrium model that features heterogeneous agents, incomplete risk sharing, and collateralized debts. Facing uninsurable income risks, households have a precautionary motive for saving and, at the aggregate level, they appear more patient than the entrepreneurs. The relative patience of the households depresses the average loan rate so that the entrepren...

The recent economic crisis highlights the role of financial markets in allowing economic agents, including prominent banks, to speculate on the future returns of different financial assets, such as mortgage-backed securities. This paper introduces a dynamic general equilibriummodel with aggregate shocks, endogeneously incomplete markets and heterogeneous agents to investigate this role of finan...

I explore alternative central bank policies for liquidity provision in a model of payments. I use a mechanism design approach so that agents’ incentives to default are explicit and contingent on the credit policy designed. In the first policy, the central bank invests in costly enforcement and charges an interest rate to recover costs. I show that the second-best solution is not distortionary. ...