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- Title
Credit Markets, Limited Commitment, and Government Debt.
- Authors
CARAPELLA, FRANCESCA; WILLIAMSON, STEPHEN
- Abstract
Adynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers' incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not.
- Subjects
PUBLIC debts; RICARDIAN equivalence theorem; CREDIT; COLLATERAL security; EQUILIBRIUM
- Publication
Review of Economic Studies, 2015, Vol 82, Issue 3, p963
- ISSN
0034-6527
- Publication type
Article
- DOI
10.1093/restud/rdv006