Week 4: 01/03/21
ECN302 – Advanced Macroeconomics – Credit constraints
Introduction of model - Video 1
The amount that the economy can borrow is limited in this topic.
Limited access to credit is more of an issue in developing countries.
Limited access to credit is a typical feature of financial & economic crises.
Credit constraint: An (ad-hoc) limit on the amount of borrowing.
We will again study a Dynamic General Equilibrium (DGE) model, where there is an endowment economy
(no production), no govt & no foreign sector. This model is very similar to the ones in the previous topics.
We’ll introduce a credit constraint as an inequality constraint.
The tool we use here is nonlinear dynamic optimisation.
The environment is deterministic.
-Nonlinear optimisation
Two polar cases:
1) Non-negativity restrictions of a variable of choice:
The problem is:
There are 3 possible solutions to this problem:
Graphically:
The general requirement is:
The third requirement is called the complimentary slackness condition. This is always the product of
the first 2 requirements.
2) Inequality of a function of the variable of choice:
The problem is:
ECN302 – Advanced Macroeconomics – Credit constraints
Introduction of model - Video 1
The amount that the economy can borrow is limited in this topic.
Limited access to credit is more of an issue in developing countries.
Limited access to credit is a typical feature of financial & economic crises.
Credit constraint: An (ad-hoc) limit on the amount of borrowing.
We will again study a Dynamic General Equilibrium (DGE) model, where there is an endowment economy
(no production), no govt & no foreign sector. This model is very similar to the ones in the previous topics.
We’ll introduce a credit constraint as an inequality constraint.
The tool we use here is nonlinear dynamic optimisation.
The environment is deterministic.
-Nonlinear optimisation
Two polar cases:
1) Non-negativity restrictions of a variable of choice:
The problem is:
There are 3 possible solutions to this problem:
Graphically:
The general requirement is:
The third requirement is called the complimentary slackness condition. This is always the product of
the first 2 requirements.
2) Inequality of a function of the variable of choice:
The problem is:
