an:02177213
Zbl 1107.91361
Gr??ne, Lars; Semmler, Willi; Sieveking, Malte
Creditworthiness and thresholds in a credit market model with multiple equilibria
EN
Econ. Theory 25, No. 2, 287-315 (2005).
00113724
2005
j
91B62 49L20 90C39
creditworthiness; default risk; imperfect capital markets; multiple equilibria; asset pricing; dynamic programming.
Summary: The paper studies creditworthiness in a model with endogenous credit cost and debt constraints. Such a model can give rise to multiple candidates for steady state equilibria. We use new analytical techniques such as dynamic programming (DP) with flexible grid size to find solutions and to locate thresholds that separate different domains of attraction. More specifically, we (1) compute present value borrowing constraints and thus creditworthiness, (2) locate thresholds where the dynamics separate to different domains of attraction, (3) show jumps in the decision variable, (4) distinguish between optimal and non-optimal steady states, (5) demonstrate how creditworthiness and thresholds change with change of the credit cost function of the debtor and (6) explore the impact of debt ceilings and consumption paths on creditworthiness.