Open Economies with Stock Collateral Constraints Under General Impatience

This paper analytically characterizes an infinite-horizon open economy under a stock collateral constraint, whereby borrowing is limited by the value of capital assets available. The model that is considered allows for general subjective discounting and fully variable productivity. Four main results are established: 1. It is possible for households to enjoy the allocation they would obtain absent the collateral constraint under a condition that relates to their patience; this condition requires a long-run depression when agents are impatient relative to the market, and allows for an economic expansion when agents are more patient relative to the market. 2. When this condition is not met, households are tightly constrained at least once and experience debt deleveraging in all periods and deflation of asset prices in periods preceding the constrained period relative to their unconstrained allocation. Households also ration their consumption more when they expect to be more tightly constrained in the future. 3. Under constant output, agents who are impatient relative to the market can face two and three-period cycles in consumption, debt, and asset prices. 4. Large initial debt can lead to multiple equilibria