The Keynote Address at the 7th NCID Research Workshop was delivered by Economics Professor at Columbia University Martín Uribe, who presented his paper Multiple Equilibria in Open Economy Models with Collateral Constraints: Overborrowing Revisited the 18th of May to kick off the round of presentations on the second day of workshop at the Fundación Ramón Areces headquarters in Madrid.

Emerging countries face borrowing constraints as foreign countries and organizations are not willing to lend money beyond a certain level, which usually is a fraction of some asset or income. Literature says that on an equilibrium emerging countries tend to overborrow, but Uribe doesn’t agree. “In this paper what we do is to first show that this type of models of small open economies are prone to multiple equilibria taking the form of self-fulfilling crisis”, he says. 

What the Keynote Speaker addresses is a situation where everyone becomes pessimistic, therefore reduce consumption, bring prices down, tighten collateral constraints and therefore cause the deleverage in the economy which justifies the initial worries. That is a self-fulfilling crisis. “Houses living in this type of economies tend to under borrow and so the economy has too much saving, this type of under borrowing is inefficient because it is the manifestation of precautionary savings in response to inefficiency in the economy.” In this situation policies are taken to put restriction to withdraw capital, such as it happened in some countries in Europe like Greece recently. Uribe concluded that under borrowing is inefficient.