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Former CREA Working Papers |
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Working Papers # 401 | | Title: | On borrowing limits and welfare | | Authors: | by Francesc Obiols-Homs | | Date: | 14-10-2009 | | Keywords: | Borrowing constraints, incomplete markets, welfare | | JEL Codes: | D52, D58, J22 | | Abstract: | | We study the e ffect of borrowing limits on welfare in several versions of exchange and production economies. There is a "quantity"
e ffect of a larger borrowing limit which is beneficial for liquidity constrained agents, but essentially irrelevant otherwise. There is also a
"price eff ect" which tends to increase the interest rate so that lenders are better off and borrowers are worse off . The combination of these eff ects produces that aggregate welfare in equilibrium (or ex ante welfare) displays an inverted U-shape as a function of the borrowing limit. In in finite horizon economies with incomplete markets we find a sizable "middle class" of not liquidity constrained but indebted agents that observes small gains, or even loses, after the borrowing limit is enlarged. | | Download this paper in a PDF file (380.63 Kb) |  Back to the list |
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