| Abstract: |
This paper analyzes quantitatively the extent to which there is overborrowing (i.e., inefficient
borrowing) in a business cycle model for emerging market economies with production and an
occasionally binding credit constraint. The main finding of the analysis is that overborrowing is not
a robust feature of this class of model economies: it depends on the structure of the economy and its
parametrization. Specifically, we find underborrowing in a production economy with our baseline
calibration, but overborrowing with more impatient agents and more volatile shocks. Endowment
economies display overborrowing regardless of parameter values, but they do not allow for policy
intervention when the constraint binds (in crisis times). Quantitatively, the welfare gains from
implementing the constrained efficient allocation are always larger near crisis times than in normal<
ones. In production economies, they are one order of magnitude larger than in endowment
economies both in crisis and normal times. This suggests that the scope for economy-wide macroprudential
policy interventions (e.g. prudential taxation of capital flows and capital controls) is
weak in this class of models. |
Banco Central de Chile