Abstract
This paper studies a model of credit based on Gu et al. (2013) with limited commitment and endogenous debt limits in a competitive search market. The credit market exhibits inherent volatility in various ways, depending on whether free entry is allowed. With no free entry, there are deterministic and stochastic cycles even though the fundamentals are deterministic and time invariant. With free entry, there are multiple positive steady states and stochastic cycles including recurrent market freezes and thaws. However, deterministic cycles disappear.
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