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Short-Run and Stationary State Effects of Credit Constraints on Investment in a Small Open Economy

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  • Stefani, Maria Lucia

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); European University Institute, Firenze)

Abstract

The purpose of this paper is to study the short-run and the long-run effects of credit constraints on investment in a small open economy, in a context of credit markets under asymmetric information. We develop a two-period model where, because of moral hazard, firms’ internal finance matters in the determination of the investment level. Moving to a dynamic overlapping generation framework, we find that credit constraints can affect the stationary state. However, extending the analysis to a cross-section of countries differing each other only for their initial level of capital, we see that initial conditions matter along the adjustment path, but do not affect the long-run equilibrium. We obtain the result that even under credit constraints due to asymmetric information these countries will converge to the same stationary state.

Suggested Citation

  • Stefani, Maria Lucia, 1994. "Short-Run and Stationary State Effects of Credit Constraints on Investment in a Small Open Economy," LIDAM Discussion Papers IRES 1994002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:1994002
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