Bidian, Florin and Bejan, Camelia (2011): Martingale properties of self-enforcing debt.
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Not-too-tight (NTT) debt limits are endogenous restrictions on debt that prevent agents from defaulting and opting for a specified continuation utility, while allowing for maximal credit expansion. For an agent facing some fixed prices for the Arrow securities, we prove that discounted NTT debt limits must differ by a martingale. Discounted debt limits are submartingales (martingales) under an interdiction to trade (borrow), and can be supermartingales under a temporary interdiction to trade. Asset price bubbles limited by the size of the total martingale components in debt limits can be sustained in equilibrium. They can counteract the effects of a credit tightening in the economy.
|Item Type:||MPRA Paper|
|Original Title:||Martingale properties of self-enforcing debt|
|Keywords:||rational bubbles, endogenous debt limits, limited enforcement, credit crunch, not-too-tight debt constraints|
|Subjects:||E - Macroeconomics and Monetary Economics > E0 - General
G - Financial Economics > G0 - General
|Depositing User:||Florin Bidian|
|Date Deposited:||18. Jul 2012 21:00|
|Last Modified:||16. Feb 2013 02:15|
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