Template-Type: ReDIF-Paper 1.0
Author-Name:  Anna Agliari
Author-X-Name-First: Anna
Author-X-Name-Last: Agliari
Author-Email:  anna.agliari@unicatt.it
Author-Workplace-Name: DISCE, Università Cattolica
Author-Name:  George Vachadze
Author-X-Name-First: George
Author-X-Name-Last: Vachadze
Author-Email:  george.vachadze@csi.cuny.edu
Author-Workplace-Name: CUNY, New York (USA)
Title:  Endogeneous Labor Supply, Borrowing Constraint and Credit Cycles
Abstract:  We investigate Matsuyama's (Econometrica, 72, pp. 853-84, 2004) model modi-
fied only to include endogenous and forward looking labor supply decision. Young
agents supply one unit of labor endowment elastically to a competitive labor
market. While, old agents of ex-ante identical individuals are divided in equi-
librium into depositors and entrepreneurs. Depositors lend funds in the form
of interest bearing loans, while entrepreneurs borrow funds in the competitive
credit market. We emphasize the interaction between credit and labor markets
and show the possibility of occurrence of multiple steady states, local and global
indeterminacy, and endogenous fluctuations.
When young agents become optimistic about the future deposit rate then they
decide to work harder and invest more. Countercyclical borrowing constraint
will help agents to fulfill their initial optimistic expectations, because the next
period credit volume and deposit rate can increase simultaneously. By conducting
global bifurcation analysis, we show that credit cycles can occur through a self-
fulfilling expectation mechanism. History-versus-expectations considerations can
exist and escape from underdevelopment as well as fall into poverty can to be a
self-fulfilling prophecy.
Length:  36 pages
Creation-Date:  2010-01
Publication-Status: Published in Review of Economics, February 2010, pages nn1-nn2
File-URL: http://www.unicatt.it/dipartimenti/DISES/allegati/dises1059.pdf
File-Format: Application/pdf
File-Function: First version, 2010
Number: dises1059
Classification-JEL: C62; E32; E44; J22; O11; O16; O41
Keywords: Borrowing constraint; Credit cycles; Elastic labor supply; Endogenous
fluctuations; Self-fulfilling expectations.
Handle: RePEc:ctc:serie2:dises1059