We study the effect of a borrowing limit on aggregate welfare in the context of an incomplete markets economy a la Aiyagari anf Huggett. We show that a larger borrowing limit is not necessarily welfare-improving.

1989 to 2000, and analyze the effect of the 1994 crisis modeled as an unexpected increase in the risk free rate. The model predicts: (i) a real exchange rate depreciation, (ii) an increase in the debt burden, (ii) a drop in output, (iii) a large decline in investment, (iv) an increase in...