Indeterminacy in credit economies

Zachary Bethune*, Tai Wei Hu, Guillaume Rocheteau

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

14 Citations (Scopus)
232 Downloads (Pure)


We characterize the equilibrium set of a two-good, pure-credit economy with limited commitment, under both pairwise and centralized meetings. We show that the set of equilibria derived under “not-too-tight” solvency constraints (Alvarez and Jermann, 2000) commonly used in the literature is of measure zero in the whole set of Perfect Bayesian Equilibria. There exist a continuum of stationary equilibria, a continuum of endogenous credit cycles of any periodicity, and a continuum of sunspot equilibria, irrespective of the assumed trading mechanism. Equilibria featuring “too-tight” solvency constraints can generate growing credit limits over time, periodic credit shutdowns, and heterogeneous debt limits across ex-ante identical borrowers. Moreover, we provide examples of credit cycles that dominate, from a social welfare point of view, all equilibria with “not-too-tight” solvency constraints.

Original languageEnglish
Pages (from-to)556-584
Number of pages29
JournalJournal of Economic Theory
Early online date14 Feb 2018
Publication statusPublished - May 2018

Structured keywords

  • ECON Microeconomic Theory
  • ECON Macroeconomics


  • Credit cycles
  • Limited commitment
  • Money


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