Memory, multiple equilibria and emerging market crises

Pierri, Damian Rene; Reffett, Kevin

Publication:
Memory, multiple equilibria and emerging market crises

dc.affiliation.dpto	UC3M. Departamento de Economía	es
dc.contributor.author	Pierri, Damian Rene
dc.contributor.author	Reffett, Kevin
dc.contributor.editor	Universidad Carlos III de Madrid. Departamento de Economía	es
dc.date.accessioned	2021-09-08T07:49:04Z
dc.date.available	2021-06-11T14:37:46Z
dc.date.issued	2021-06-11
dc.description.abstract	We present a new Generalized Markov Equilibrium (GME) approach to studying sudden stops and financial crises in emerging countries in the canonical small open economy model with equilibrium price-dependent collateral constraints. Our approach to characterizing and computing stochastic equilibrium dynamics is global, encompasses recursive equilibrium as a special case, yet allows for a much more flexible approach to modeling memory in such models that are known to have multiple equilibrium. We prove the existence of ergodic GME selections from the set of sequential competitive equilibrium, and show that at the same time ergodic GME selectors can replicate all the observed phases of the macro crises associated with a sudden stop (boom, collapse, spiralized recession, recovery) while still being able to capture the long-run stylized behavior of the data. We also compute stochastic equilibrium dynamics associated with stationary and nonstationary GME selections, and we find that a) the ergodic GME selectors generate stochastic dynamics that are less financially constrained with respect to stationary non-ergodic paths, b) non-stationary GME selections exhibit a great range of fluctuations in macroeconomic aggregates compared to the stationary selections. From a theoretical perspective, we prove the existence of both sequential competitive equilibrium and (minimal state space) recursive equilibrium, as well as provide a complete theory of robust recursive equilibrium comparative statics in deep parameters. Consistent with recent results in the literature, relative to the set of recursive equilibrium, we find 2 stationary equilibrium: one with high/over borrowing, the other with low/under borrowing. These equilibrium are extremal and “selffulfilling” under rational expectations. The selection among these equilibria depend on observable variables and not on sunspots.	en
dc.identifier.issn	2340-5031	es
dc.identifier.uri	https://hdl.handle.net/10016/32871
dc.identifier.uxxi	DT/0000001920
dc.language.iso	eng
dc.relation.ispartofseries	Working paper. Economics	en
dc.relation.ispartofseries	21-05
dc.rights	Atribución-NoComercial-SinDerivadas 3.0 España	*
dc.rights.uri	http://creativecommons.org/licenses/by-nc-nd/3.0/es/	*
dc.subject.other	Financial Crises	en
dc.subject.other	Small Open Economies	en
dc.subject.other	Ergodicity	en
dc.subject.other	Recursive Equilibrium	en
dc.subject.other	Generalized Markov Equilibria	en
dc.title	Memory, multiple equilibria and emerging market crises	en
dc.type	working paper	*
dspace.entity.type	Publication