Creditworthyness and thresholds in a credit market model with multiple equilibria

L. Grüne, W. Semmler, M. Sieveking: Creditworthyness and thresholds in a credit market model with multiple equilibria
Economic Theory 25, 287 - 315, 2005

DOI: 10.1007/s00199-003-0442-8
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Abstract:

The paper studies a credit market model with endogenous credit cost and debt constraints in which multiple candidates for steady state equilibria arise. We use dynamic programming (DP) with flexible grid size to locate thresholds that separate different domains of attraction. More specifically, we employ DP to (1) compute present value borrowing constraints and thus creditworthiness, (2) locate thresholds where the dynamics separate to different domains of attraction, (3) distinguish between optimal and non-optimal steady states and (4) demonstrate how the thresholds change with change of the credit cost function of the debtor and (5) explore the impact of debt ceilings and consumption paths on creditworthiness. The analytics is provided for a general model and some generic results are presented for a one state variable problem.

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