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Endogenous Financial Development and Multiple Growth Regimes

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Author Info
Costas Azariadis () (University of California, Los Angeles)
Leo Kaas () (University of Vienna)

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Abstract

The paper analyzes a linear growth model with idiosyncratic productivity shocks and self-enforcing loan contracts. Agents cannot commit to repay their loans because of insuficient collateral, but the threat of credit market exclusion prevents agents from default. Credit repayment is enforced by endogenously specified credit constraints that are imposed on each agent at each point in time. There is a dynamic complementarity between these credit constraints that gives rise to multiple balanced-growth paths. A high-growth equilibrium with developed credit markets can coexist with one or two low-growth equilibria with underdeveloped credit markets. Moreover, low-growth equilibria are more volatile since they are exposed to shocks to the wealth distribution and to sunspot shocks.

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Publisher Info
Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2004/08.

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Length: 35 pages
Date of creation: 2004
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Handle: RePEc:cea:doctra:e2004_08

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Related research
Keywords: Endogenous growth Limited enforcement Credit constraints Indeterminacy.

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Find related papers by JEL classification:
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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References listed on IDEAS
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  1. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
  2. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June. [Downloadable!] (restricted)
    Other versions:
  3. Azariadis, Costas & Kaas, Leo, 2007. "Asset price fluctuations without aggregate shocks," Journal of Economic Theory, Elsevier, vol. 127(1), pages 126-143, September. [Downloadable!] (restricted)
  4. repec:att:wimass:1919983 is not listed on IDEAS
  5. Azariadis, Costas & Chakraborty, Shankha, 1999. "Agency Costs in Dynamic Economic Models," Economic Journal, Royal Economic Society, vol. 109(455), pages 222-41, April. [Downloadable!] (restricted)
  6. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March. [Downloadable!] (restricted)
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  7. Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Blackwell Publishing, vol. 63(4), pages 595-609, October. [Downloadable!] (restricted)
  8. Durlauf, Steven N & Johnson, Paul A, 1995. "Multiple Regimes and Cross-Country Growth Behaviour," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(4), pages 365-84, Oct.-Dec.. [Downloadable!] (restricted)
  9. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 35-52, January. [Downloadable!] (restricted)
  10. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August. [Downloadable!] (restricted)
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  11. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May. [Downloadable!] (restricted)
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  12. Dirk Krueger & Fabrizio Perri, 1999. "Risk sharing: private insurance markets or redistributive taxes?," Staff Report 262, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  13. Thorsten V. Koeppl, 2004. "Risk Sharing through Financial Markets with Endogenous Enforcement of Trades," Econometric Society 2004 North American Winter Meetings 326, Econometric Society. [Downloadable!]
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  14. Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
    Other versions:
  15. Denizer, Cevdet & Iyigun, Murat F. & Owen, Ann L., 2000. "Finance and macroeconomic volatility," Policy Research Working Paper Series 2487, The World Bank. [Downloadable!]
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  16. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December. [Downloadable!] (restricted)
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  17. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Blackwell Publishing, vol. 60(4), pages 865-88, October. [Downloadable!] (restricted)
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  18. Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 709-51, August.
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  19. Costas Azariadis & Luisa Lambertini, 2003. "Endogenous Debt Constraints in Lifecycle Economies," Review of Economic Studies, Blackwell Publishing, vol. 70(3), pages 461-487, 07. [Downloadable!] (restricted)
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