Endogenous borrowing constraints and default when markets are incomplete

Incomplete markets and non-default borrowing constraints increase the volatility of pricing kernels and are helpful when addressing assetpricing puzzles. However, ruling out default when markets are in complete is suboptimal. This paper endogenizes borrowing constraints as an intertemporal incentive structure to default. It modeIs an infinitehorizon economy, where agents are allowed not to pay their liabilities and face borrowing constraints that depend on the individual history of default. Those constraints trade off the economy's risk-sharing possibilities and incentives to prevent default. The equilibrium presents stationary properties, such as an invariant distribution for the assets' solvency rate.

Endogenous debt constraints in collateralized economies with default penalties

In infinite horizon financial markets economies, competitive equilibria fail to exist if one does not impose restrictions on agents' trades that rule out Ponzi schemes. When there is limited commitment and collateral repossession is the unique default punishment, Araujo, Páscoa and Torres-Martínez (2002) proved that Ponzi schemes are ruled out without imposing any exogenous/endogenous debt constraints on agents' trades. Recently Páscoa and Seghir (2009) have shown that this positive result is not robust to the presence of additional default punishments. They provide several examples showing that, in the absence of debt constraints, harsh default penalties may induce agents to run Ponzi schemes that jeopardize equilibrium existence. The objective of this paper is to close a theoretical gap in the literature by identifying endogenous borrowing constraints that rule out Ponzi schemes and ensure existence of equilibria in a model with limited commitment and (possible) default. We appropriately modify the definition of finitely effective debt constraints, introduced by Levine and Zame (1996) (see also Levine and Zame (2002)), to encompass models with limited commitment, default penalties and collateral. Along this line, we introduce in the setting of Araujo, Páscoa and Torres-Martínez (2002), Kubler and Schmedders (2003) and Páscoa and Seghir (2009) the concept of actions with finite equivalent payoffs. We show that, independently of the level of default penalties, restricting plans to have finite equivalent payoffs rules out Ponzi schemes and guarantees the existence of an equilibrium that is compatible with the minimal ability to borrow and lend that we expect in our model. An interesting feature of our debt constraints is that they give rise to budget sets that coincide with the standard budget sets of economies having a collateral structure but no penalties (as defined in Araujo, Páscoa and Torres-Martínez (2002)). This illustrates the hidden relation between finitely effective debt constraints and collateral requirements.

Job search and asset accumulation under borrowing constraints

In this paper I show how borrowing constraints and job search interact.I fit a dynamic model to data from the National Longitudinal Survey(1979-cohort) and show that borrowing constraints are significant. Agentswith more initial assets and more access to credit attain higher wagesfor several periods after high school graduation. The unemployed maintaintheir consumption by running down their assets, while the employed saveto buffer against future unemployment spells. I also show that, unlikein models with exogenous income streams, unemployment transfers, byallowing agents to attain higher wages do not 'crowd out' but increasesaving.

Essays in open economy macroeconomics with borrowing frictions

Cette thèse comporte trois essais en macroéconomie en économie ouverte et commerce international. Je considère tour à tour les questions suivantes: sous quelles conditions est-il optimal pour un pays de former une union économique? (essai 1); l'augmentation de la dispersion transversale des avoirs extérieurs nets des pays est-elle compatible avec une dispersion relativement stable des taux d'investissement? (essai 2); le risque de perte de marché à l'exportation du fait de l'existence des zones de commerce préférentiel joue t-il un rôle dans la décision des pays exclus de négocier des accords commerciaux à leur tour? (essai 3). Le premier essai examine les conditions d'optimalité d'une union économique. Il s'intéresse à une motivation particulière: le partage du risque lié aux fluctuations du revenu. Dans la situation initiale, les pays ont très peu d'opportunités pour partager le risque à cause des frictions: les marchés financiers internationaux sont incomplets et il n'y pas de mécanisme pour faire respecter les contrats de crédit entre pays. Dans ce contexte, une union économique apparait comme un arrangement qui pallie à ces frictions entre les pays membres seulement. Cependant, l'union dans son ensemble continue de faire face à ces frictions lorsqu'elle échange avec le reste du monde. L'arbitrage clé dans le modèle est le suivant. D'un coté, l'intégration économique permet un meilleur partage du risque entre pays membres et la possibilité pour le partenaire pauvre d'utiliser la ligne de crédit du partenaire riche en cas de besoin. De l'autre coté, l'union peut faire face à une limite de crédit plus restrictive parce que résilier la dette extérieure est moins coûteux pour les membres l'union. De plus, le fait que le partenaire pauvre peut utiliser la limite de crédit du partenaire riche génère une externalité négative pour ce dernier qui se retrouve plus fréquemment contraint au niveau des marchés internationaux des capitaux. En conformité avec les faits observés sur l'intégration économique, le modèle prédit que les unions économiques sont relativement peu fréquentes, sont plus susceptibles d'être créées parmi des pays homogènes, et généralement riches. Le deuxième essai porte sur la dispersion des avoirs extérieurs nets et la relation avec la dispersion des taux d'investissement. Au cours des récentes décennies, la dispersion croissante des déséquilibres extérieurs et les niveaux record atteints par certaines grandes économies ont reçu une attention considérable. On pourrait attribuer ce phénomène à une réduction des barrières aux mouvements internationaux des capitaux. Mais dans ce cas, il est légitime de s'attendre à une augmentation de la dispersion au niveau des taux d'investissement; ceci, parce que le financement des besoins en investissements constitue une raison fondamentale pour laquelle les pays échangent les capitaux. Les données indiquent cependant que la dispersion des taux d'investissement est restée relativement stable au cours des récentes décennies. Pour réconcilier ces faits, je construis un modèle d'équilibre général dynamique et stochastique où les pays sont hétérogènes en raison des chocs idiosyncratiques à leurs niveaux de productivité totale des facteurs. Au niveau des marchés internationaux des capitaux, le menu des actifs disponibles est restreint à une obligation sans risque et il n'y a pas de mécanisme pour faire respecter les contrats de crédit entre pays. A tout moment, un pays peut choisir de résilier sa dette extérieure sous peine d'exclusion financière et d'un coût direct. Ce coût direct reflète les canaux autres que l'exclusion financière à travers lesquels les pays en défaut sont pénalisés. Lorsque le modèle est calibré pour reproduire l'évolution de la dispersion transversale des avoirs extérieurs nets, il produit une dispersion relativement stable des taux d'investissement. La raison principale est que les incitations que les pays ont à investir sont liées à la productivité. Avec l'intégration financière, même si les opportunités d'emprunt se sont multipliées, les incitations à investir n'ont pas beaucoup changé. Ce qui permet de générer une dispersion accrue de la position des avoirs extérieurs nets des pays avec une dispersion relativement stable des taux d'investissement. Le troisième essai analyse un aspect de l'interdépendance dans la formation des accords commerciaux préférentiels: j'examine empiriquement si le risque de diversion des exportations en faveur des pays membres des zones de commerce préférentiel est un facteur déterminant dans la décision des pays exclus de ces accords de négocier un accord à leur tour. Je construis un indicateur qui mesure le potentiel de diversion des exportations auquel font face les pays et estime un modèle probit de formation des zones de commerce préférentiel créées entre 1961 et 2005. Les résultats confirment que les pays confrontés à un plus grand potentiel de détournement des échanges sont plus susceptibles de former une zone de commerce préférentiel à leur tour.

Credit borrowing constraints in a DSGE framework: income vs. housing

Credit market in Brazil distinguishes from advanced economies in many aspects. One of them is related to collaterals for households borrowing. This work proposes a DSGE framework, based on Gerali et al.(2010), to analyse one pecularity of Brazillian credit market: payroll-deducted personal loans. To original model, we added the possibility to households contract long term debt and compare to differents types of credit constrains: one based on housing and other based on future income. We callibrate and estimate the model to Brazil, using Bayesian technique. Results show that, in a economy where credit constraints are based on income, responses to shocks appear to be stronger, at first, but dissipate faster. This occurs because income responds quickly to shock than housing prices, so does amount available to loans. In order to smooth consumption, agents compensate lower income and borrowing by increasing working hours, restoring loans and debt in a shorter time.

Do borrowing constraints decrease intergenerational mobility? evidence from Brazil

In this paper, we find evidence that suggests that borrowing constraints may be an important determinant of intergenerational mobility in Brazil. This result contrasts sharply with studies for developed countries, such as Canada and the US, where credit constraints do not seem to play an important role in generating persistence of inequality. Moreover, we find that the social mobility is lower in Brazil in comparison with developed countries. We follow the methodology proposed by Grawe (2001), which uses quantile regression, and obtain two results. First, the degree of intergenerational persistence is greater for the upper quantiles. Second, the degree of intergenerational persistence declines with income at least for the upper quantiles. Both findings are compatible with the presence of borrowing constraints affecting the degree of intergenerational persistence, as predicted by the theory.

Household borrowing constraints and monetary policy in emerging economies

Credit markets in emerging economies can be distinguished from those in advanced economies in many respects, including the collateral required for households to borrow. This work proposes a DSGE framework to analyze one peculiarity that characterizes the credit markets of some emerging markets: payroll-deducted personal loans. We add the possibility for households to contract long-term debt and compare two different types of credit constraints with one another, one based on housing and the other based on future income. We estimate the model for Brazil using a Bayesian technique. The model is able to solve a puzzle of the Brazilian economy: responses to monetary shocks at first appear to be strong but dissipate quickly. This occurs because income – and the amount available for loans – responds more rapidly to monetary shocks than housing prices. To smooth consumption, agents (borrowers) compensate for lower income and for borrowing by working more hours to repay loans and erase debt in a shorter time. Therefore, in addition to the income and substitution effects, workers consider the effects on their credit constraints when deciding how much labor to supply, which becomes an additional channel through which financial frictions affect the economy.

On the Individual Optimality of Economic Integration

Ce document est une version antérieure du document "On the Individual Optimality of Economic Integration", nov. 2015 : http://hdl.handle.net/1866/12794

On the individual optimality of economic integration

Which countries find it optimal to form an economic union? We emphasize the risk-sharing benefits of economic integration. Consider an endowment world economy model, where international financial markets are incomplete and contracts not enforceable. A union solves both frictions among member countries. We uncover conditions on initial incomes and net foreign assets of potential union members such that forming a union is welfare-improving over standing alone in the world economy. Consistently with evidence on economic integration, unions in our model occur (i) relatively infrequently, and (ii) emerge more likely among homogeneous countries, and (iii) rich countries.

On the individual optimality of economic integration

Ce document est une version mise-à-jour du document "On the individual optimality of economic integration", mars 2011 : http://hdl.handle.net/1866/4829

Wealth composition, endogenous fertility and the dynamics of income inequality

This paper analyzes how differences in the composition of wealth between human and physical capital among families affect fertility choices. These in tum influence the dynamics of wealth and income inequality across generations through a tradeoffbetween quantity and quality of children. Wealth composition affects fertility because physical capital has only a wealth effect on number of children, whereas human capital increases the time cost of child-rearing in addition to the wealth effect. I construct a model combining endogenous fertility with borrowing constraints in human capital investments, in which weaIth composition is determined endogenously. The model is calibrated to the PNAD, a Brazilian household survey, and the main findings of the paper can be summarized as follows. First, the model implies that the crosssection relationship between fertility and wealth typically displays a U-shaped pattem, reflecting differences in wealth composition between poor and rich families. Also, the quantity-quality tradeoff implies a concave cross-section relationship between investments per child and wealth. Second, as the economy develops and families overcome their bOlTowing constraints, the negative effect of weaIth on fertility becomes smaller, and persistence of inequality declines accordingly. The empirical evidence presented in this paper is consistent with both implications .

Credit Constraints, Firms' Precautionary Investment, and the Business Cycle

This paper studies the macroeconomic implications of firms' precautionary investment behavior in response to the anticipation of future financing constraints. Firms increase their demand for liquid and safe investments in order to alleviate future borrowing constraints and decrease the probability of having to forego future profitable investment opportunities. This results in an increase in the share of short-term projects that produces a temporary increase in output, at the expense of lower long-run investment and future output. I show in a calibrated model that this behavior is at the source of a novel and powerful channel of shock transmission of productivity shocks that produces short-run dampening and long-run propagation. Furthermore, it can account for the observed business cycle patterns of the aggregate and firm-level composition of investment.

Equilibrium asset prices and savings of heterogeneous agents in the presence of incomplete markets and portfolio constraints

We study the quantitative properties of a dynamic general equilibrium model in which agents face both idiosyncratic and aggregate income risk, state-dependent borrowing constraints that bind in some but not all periods and markets are incomplete. Optimal individual consumption-savings plans and equilibrium asset prices are computed under various assumptions about income uncertainty. Then we investigate whether our general equilibrium model with incomplete markets replicates two empirical observations: the high correlation between individual consumption and individual income, and the equity premium puzzle. We find that, when the driving processes are calibrated according to the data from wage income in different sectors of the US economy, the results move in the direction of explaining these observations, but the model falls short of explaining the observed correlations quantitatively. If the incomes of agents are assumed independent of each other, the observations can be explained quantitatively.