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Federal Reserve Bank of St. Louis
Working Papers
Credit markets, limited commitment, and government debt
Stephen D. Williamson
Francesca Carapella
Abstract

A dynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers’ incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not.


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Stephen D. Williamson & Francesca Carapella, Credit markets, limited commitment, and government debt, Federal Reserve Bank of St. Louis, Working Papers 2014-10, 24 Feb 2014.
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