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Chaotic Dynamics in Credit Constrained Emerging Economies

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  • Jordi Caballé
  • Xavier Jarque
  • Elisabetta Michetti

Abstract

This paper analyzes the role of financial development as a source of endogenous instability in small open economies. By assuming that firms face credit constraints, our model displays a complex dynamic behavior for intermediate values of the parameter representing the level of financial development of the economy. The basic implication of our model is that economies experiencing a process of financial development are more unstable than both very underdeveloped and very developed economies. Our instability concept means that small shocks have a persistent effect on the long run behavior of the model and also that economies can exhibit cycles with a very high period or even chaotic dynamic patterns.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 121.

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Date of creation: Apr 2004
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Handle: RePEc:bge:wpaper:121

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Keywords: Chaotic Dynamics; credit constraints; financial development;

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References

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  1. Deneckere, Raymond & Pelikan, Steve, 1986. "Competitive chaos," Journal of Economic Theory, Elsevier, vol. 40(1), pages 13-25, October.
  2. Betty Daniel & John Bailey Jones, 2001. "Financial Liberalization and Banking Crises in Emerging Economies," Discussion Papers 01-04, University at Albany, SUNY, Department of Economics.
  3. Piketty, Thomas & Banerjee, Abhijit & Aghion, Philippe, 1997. "Dualism and macroeconomic volatility," CEPREMAP Working Papers (Couverture Orange) 9720, CEPREMAP.
  4. Boldrin, Michele & Montrucchio, Luigi, 1986. "On the indeterminacy of capital accumulation paths," Journal of Economic Theory, Elsevier, vol. 40(1), pages 26-39, October.
  5. Banerjee, Abhijit & Bacchetta, Philippe & Aghion, Philippe, 2001. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," Scholarly Articles 4554218, Harvard University Department of Economics.
  6. Petrei, A. Humberto & Tybout, James, 1985. "Microeconomic adjustments in Argentina during 1976-1981: The importance of changing levels of financial subsidies," World Development, Elsevier, vol. 13(8), pages 949-967, August.
  7. Stutzer, Michael J., 1980. "Chaotic dynamics and bifurcation in a macro model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 2(1), pages 353-376, May.
  8. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "Financial development and the instability of open economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(6), pages 1077-1106, September.
  9. Philippe AGHION & Philippe BACCHETTA & Abhijit BANERJEE, 1999. "A Simple Model of Monetary Policy and Currency Crises," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 9914, Université de Lausanne, Faculté des HEC, DEEP.
  10. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers, Edinburgh School of Economics, University of Edinburgh 1995-5, Edinburgh School of Economics, University of Edinburgh.
  11. Day, Richard H, 1982. "Irregular Growth Cycles," American Economic Review, American Economic Association, vol. 72(3), pages 406-14, June.
  12. Michael J. Stutzer, 1980. "Chaotic dynamics and bifurcation in a macro model," Staff Report, Federal Reserve Bank of Minneapolis 55, Federal Reserve Bank of Minneapolis.
  13. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  14. Azariadis, Costas & Smith, Bruce, 1998. "Financial Intermediation and Regime Switching in Business Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 516-36, June.
  15. Benhabib, Jess & Day, Richard H, 1981. "Rational Choice and Erratic Behaviour," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(3), pages 459-71, July.
  16. Benhabib, Jess & Day, Richard H., 1982. "A characterization of erratic dynamics in, the overlapping generations model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 4(1), pages 37-55, November.
  17. Cars Hommes & Helena Nusse, 1991. "“Period three to period two” bifurcation for piecewise linear models," Journal of Economics, Springer, Springer, vol. 54(2), pages 157-169, June.
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Citations

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Cited by:
  1. Kunieda, Takuma, 2008. "Finance and Growth Cycles," MPRA Paper 11340, University Library of Munich, Germany.
  2. Gomes, Orlando, 2007. "Constraints on credit, consumer behaviour and the dynamics of wealth," MPRA Paper 2886, University Library of Munich, Germany.
  3. Augier, Laurent & Soedarmono, Wahyoe, 2010. "Threshold Effect and Financial Intermediation in Economic Development," MPRA Paper 20494, University Library of Munich, Germany.
  4. Tarishi Matsuoka & Katsuyuki Naito & Keigo Nishida, 2011. "The Politics of Financial Development and Capital Accumulation," KIER Working Papers 793, Kyoto University, Institute of Economic Research.
  5. Gomes, Orlando, 2007. "Nonlinear dynamics in a model of financial development with a risk premium," MPRA Paper 2887, University Library of Munich, Germany.
  6. Orlando Gomes, 2006. "Local Bifurcations and Global Dynamics in a Solow-type Endogenous Business Cycles Model," Annals of Economics and Finance, Society for AEF, vol. 7(1), pages 91-127, May.
  7. Real Arai & Takuma Kunieda & Keigo Nishida, 2014. "Is Public Debt Growth-Enhancing or Growth-Reducing?," KIER Working Papers 884, Kyoto University, Institute of Economic Research.
  8. Orgiazzi, Elsa, 2008. "Financial development and instability: The role of the labour share," Research in Economics, Elsevier, Elsevier, vol. 62(4), pages 215-236, December.
  9. Orlando Gomes, 2006. "Routes to chaos in macroeconomic theory," Journal of Economic Studies, Emerald Group Publishing, Emerald Group Publishing, vol. 33(6), pages 437-468, November.
  10. Gomes, Orlando, 2007. "Time preference and cyclical endogenous growth," MPRA Paper 3282, University Library of Munich, Germany.
  11. Gomes, Orlando, 2007. "On the allocation of credit and aggregate fluctuations," MPRA Paper 2889, University Library of Munich, Germany.
  12. Das, Satya P., 2008. "Some mechanisms of terror cycles," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 644-656, September.
  13. Orlando Gomes, 2008. "Time Preference and Cyclical Endogenous Growth in an AK Growth Model," Notas Económicas, Faculdade de Economia, Universidade de Coimbra, Faculdade de Economia, Universidade de Coimbra, issue 28, pages 32-55, December.
  14. Gomes, Orlando, 2007. "Socially determined time preference in discrete time," MPRA Paper 3442, University Library of Munich, Germany.
  15. Orlando Gomes, 2010. "Deterministic randomness in a model of finance and growth," Journal of Evolutionary Economics, Springer, Springer, vol. 20(1), pages 95-114, January.
  16. Patrick-Antoine Pintus, 2007. "Procyclical International Capital Flows, Debt Overhang And Volatility," Working Papers halshs-00353596, HAL.
  17. Borusyak, K., 2011. "Nonlinear Dynamics of the Russian Stock Market in Problems of Risk Management," Journal of the New Economic Association, New Economic Association, New Economic Association, issue 11, pages 85-105.

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