RT Generic
T1 Memory, multiple equilibria and emerging market crises
A1 Pierri, Damian Rene
A1 Reffett, Kevin
A2 Universidad Carlos III de Madrid. Departamento de Economía, 
AB We present a new Generalized Markov Equilibrium (GME) approach to studying sudden stopsand financial crises in emerging countries in the canonical small open economy model with equilibrium price-dependent collateral constraints. Our approach to characterizing and computing stochasticequilibrium dynamics is global, encompasses recursive equilibrium as a special case, yet allows for amuch more flexible approach to modeling memory in such models that are known to have multipleequilibrium. We prove the existence of ergodic GME selections from the set of sequential competitiveequilibrium, and show that at the same time ergodic GME selectors can replicate all the observedphases 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 computestochastic equilibrium dynamics associated with stationary and nonstationary GME selections, andwe find that a) the ergodic GME selectors generate stochastic dynamics that are less financiallyconstrained with respect to stationary non-ergodic paths, b) non-stationary GME selections exhibita great range of fluctuations in macroeconomic aggregates compared to the stationary selections.From a theoretical perspective, we prove the existence of both sequential competitive equilibriumand (minimal state space) recursive equilibrium, as well as provide a complete theory of robustrecursive equilibrium comparative statics in deep parameters. Consistent with recent results in theliterature, relative to the set of recursive equilibrium, we find 2 stationary equilibrium: one withhigh/over borrowing, the other with low/under borrowing. These equilibrium are extremal and “selffulfilling” under rational expectations. The selection among these equilibria depend on observablevariables and not on sunspots.
SN 2340-5031
YR 2021
FD 2021-06-11
LK https://hdl.handle.net/10016/32871
UL https://hdl.handle.net/10016/32871
LA eng
DS e-Archivo
RD 16 jul. 2024