Cycles and self-fulfilling crises in open economies with stock collateral constraints under impatience

This paper analytically characterizes an infinite-horizon open economy with agents that are impatient relative to the market under a stock collateral constraint, whereby borrowing is collateralized by capital assets. Households can enjoy an unconstrained allocation under a long-run depression. However, under a stable output path, the constraint binds infinitely often, leading, in all periods, to reduced debt and deflated asset prices relative to the unconstrained allocation. Under plausible parametrizations, two and three-period cycles in consumption, debt, and asset prices can emerge under constant output. Further, high indebtedness can allow for multiple equilibria.