Browsing by Author "Carli, Francesco"
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- Imperfect competition in the banking sector and economic instabilityPublication . Carli, Francesco; Lloyd-Braga, Teresa; Modesto, LeonorWe study the impact of competition in the banking sector on the emergence of endogenous cycles driven by self-fulling volatile expectations. We consider an OLG model with two sectors and two household types: workers, who consume and work when young and save through bank deposits; and entrepreneurs, who seek bank loans to finance current consumption and to invest in a productive technology that transforms the consumption good into capital. When old, entrepreneurs rent this capital to firms, who produce the consumption good using capital and labor. All markets are perfectly competitive, except the loans market where banks compete à la Cournot under free entry and exit. In the absence of externalities in the capital producing technology, more competition in the banking sector promotes the emergence of local indeterminacy and sunspots fluctuations. In contrast, under constant social returns to scale in the capital producing technology, bank market power alone triggers the emergence of local indeterminacy. With increasing social returns to scale, both market power and externalities facilitate the emergence of local indeterminacy. Additionally, when banks have market power, steady state multiplicity may emerge, opening the way to global indeterminacy and fluctuations.
- Sovereign debt, fiscal policy, and macroeconomic instabilityPublication . Carli, Francesco; Modesto, LeonorWe study the relation between capital accumulation, fiscal policy, and sovereign debt dynamics in a small open economy. The government maximizes spending, facing borrowing constraints and a conditionality requirement. Debt dynamics are forward looking, being driven by the endogenous borrowing constraint. Current debt is determined by expectations about the government's ability to finance itself in the future, opening the room for indeterminacy. If the government believes it may issue more debt next period, the borrowing constraint relaxes, and current debt increases. The government invests more in productive activities, generating a boom which increases tax revenues. However, as this increase does not repay the additional debt, the government will issue more debt next period, confirming initial expectations. To exclude explosive trajectories, tax revenues must increase enough to repay the outstanding debt and reduce future debt emission. This is possible only with a sufficiently procyclical tax rate. In this case, if productive externalities are large enough, the economy exhibits local and global indeterminacy, as steady-state multiplicity is also obtained. Avoiding sufficiently procyclical tax rates, the government can prevent local and global fluctuations driven by self-fulfilling volatile expectations. This differs from the general wisdom that procyclical tax rates should be used for stabilization.