IDB WORKING PAPER SERIES No. IDB-WP-185
Revisiting Overborrowing and its Policy Implications Gianluca Benigno Huigang Chen Christopher Otrok Alessandro Rebucci Eric R. Young
July 2010
Inter-American Development Bank Department of Research and Chief Economist
Revisiting Overborrowing and its Policy Implications
Gianluca Benigno* Huigang Chen** Christopher Otrok*** Alessandro Rebucci**** Eric R. Young*** * London School of Economics ** J.D. Power *** University of Virginia **** Inter-American Development Bank
Inter-American Development Bank 2010
Cataloging-in-Publication data provided by the Inter-American Development Bank Felipe Herrera Library Revisiting overborrowing and its policy implications / Gianluca Benigno ‌ [et al.]. p. cm. (IDB working paper series ; 185) Includes bibliographical references. 1. Loans. 2. Credit. 3. Finance. 4. Economic Policy. I. Beningno, Gianluca. II. Chen, Huigang. III. Otrok, Christopher. IV. Rebucci, Alessandro. V. Young, Eric R. VI. Inter-American Development Bank. Research Dept. VII. Series. HG3891.5.R48 2010
Š Inter-American Development Bank, 2010 www.iadb.org
Documents published in the IDB working paper series are of the highest academic and editorial quality. All have been peer reviewed by recognized experts in their field and professionally edited. The information and opinions presented in these publications are entirely those of the author(s), and no endorsement by the Inter-American Development Bank, its Board of Executive Directors, or the countries they represent is expressed or implied. This paper may be freely reproduced provided credit is given to the Inter-American Development Bank.
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Figure 1: Decision Rule For Foreign Borrowing (Competitive Equilibrium) −0.5
−0.6
−0.7
B(t+1)
−0.8
−0.9
ε
−1
1
ε2 ε
3
−1.1
−1.1
−1.05
−1
−0.95
B(t)
−0.9
−0.85
−0.8
−0.75
0.4
0.45
0.5 05
0.55
0.6
0.65
-1.25
-1.25
0.7
-1.05
-1.05
0
h
B(t)
B(t)
-0.65 -0.65
0.2
-0.45 -0.45
0.4
-0.25 -0.25
0.6
-0.05 -0.05
ct
h
pn ct 1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
0
0.2
0.4
0.6
0.8
-1.25 -1.25
0.8
-1.05 -1.05
1
-0.85 -0.85
1.2
cn
B(t)
B(t)
pn
-0.65 -0.65
1
-0.85
-0.85
ct
-0.45 -0.45
1.2
-0.25 -0.25
Figure 2: Decision Rules For Relative Price, Consumption, and Labor (Competitive Equilibrium)
-0.05 -0.05
Figure 3. Ergodic Distribution For Foreign Borrowing
1) b(t+1) -1.2
-1
-0.8
-0.6
-0.4
02 -0.2
0 CE
SP
-0.80 80 B(t)
b(t+1)
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-0.70 70
-0.90 90
-1.00 00
-1.10 10
Figure 4: Decision Rule For Foreign Borrowing (Competitive Equilibrium and Social Planner)
-0.50 50
0.3
0.35
0.4
0.45
0.5
0.55
0.6
0.65
-1.25
-1.25
0.7
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-1.05
0
h
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0.2
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0.4
-0.25 -0.25
0.6
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0.9
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1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
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0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
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Figure 5: Decision Rules For Relative Prices, Consumption, Labor (Competitive Equilibrium and Social Planner)
-0.25 -0.25
h
-0.05 -0.05
0
5000
10000
15000
20000
25000
30000
-1.1
-1
-0.9
-0.8
-0.7
-0.6
Figure 6: Ergodic Distribution For Foreign Borrowing (Competitive Equilibrium and Social Planner)
sp
ce
-0.5
0
1
2
3
4
5
6
7
8
9
-1.05
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-1.5
CE
SP
pn
B(t)
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-0.5
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b(t+1)
pn
ct h
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0.3
0.35
0.4
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0.5
0.55
0.6
0.65
0.7
0
0.2
0.4
0.6
0.8
1
1.2
1.4
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0.5
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CE
SP
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SP
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1.6
h
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Figure 7: Alternative Calibration (More impatient agents and larger shocks) Decision Rules For Foreign Borrowing, Relative Price, Tradable Consumption, and Labor (Competitive Equilibrium and Social Planner)
-0.05 -0.05 0.05
0
5000
10000
15000
20000
25000
30000
-1.1
-1
-0.9
-0.8
-0.7
-0.6
sp
ce
Figure 8: Alternative Calibration (More impatient agents and larger shocks) Ergodic Distribution For Foreign Borrowing (Competitive Equilibrium and Social Planner)
-0.5
-1
-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
-1
-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
CE
SP
-1.00
-1.00
b(t+1)
b(t+1)
CE
-0.90
-0.90
SP
B(t)
B(t)
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-0.1
-0.70 -0.70
-1.1
0
5000
10000
15000
20000
25000
30000
-1.1
Panel B. Alternative calibration
0
5000
10000
15000
20000
25000
30000
-1
-1
-0.9
-0.9
Figure 9: Endowment Economies under Alternative Calibrations (Competitive Equilibium and Social Planner) Panel A. Baseline calibration
-0.60 -0.60
0
-1.10
-1.10
-0.50 -0.50
-0.8
-0.8
-0.7
-0.7
-0.6
-0.6
sp
ce
sp
ce
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-0.5
0
0.5
1
1.5
2
CE
SP
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-0.95
2.5
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-0.85
-0.85
-0.90
-0.90
-1.00
-1.00
0
pn
B(t)
B(t)
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0.2
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0.4 0 4
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0.6
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0.8
-0.55 -0.55
ct
pn
ct pn
1
-0.50 -0.50
CE
0
0.5
1
1.5
2
2.5
0
0.2
0.4 0 4
0.6
0.8
1
CE
SP
CE
SP
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SP
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1.2
-1.10
ct
B(t)
B(t)
pn
ct
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1.2
-0.70 -0.70
Panel B. Alternative calibration
-0.60 -0.60
Panel A. Baseline calibration
-1.10
Figure 10: Endowment Economies under Alternative Calibrations (Competitive Equilibium and Social Planner)
-0.50 -0.50