In an older post on how to determine the dynamics of domestic bonds (Dynare forums • View topic - Simple NK Model), which are otherwise indeterminate, there is the following suggestion by jpfeifer :
In closed economy models you can generate something similar by having a borrowing constraint where the Lagrange multiplier on the constraint increases in debt and therefore creates a “utility premium”.
The intuition is similar to Schmitt-Grohe/Uribe on open economies and the trick works in practice, but does anyone has a reference to an article where this is actually done?
Thanks!