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Is History a Blessing or a Curse? International Borrowing without Commitment, Leapfrogging and Growth Reversals

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Author Info

  • Raouf BOUCEKKINE

    ()
    (Université Catholique de Louvain and IRES-CORE, Université de la Méditérranée and GREQAM)

  • Patrick A. PINTUS

    ()
    (Universite de la Mediterranee and GREQAM-IDEP, Institut Universitaire de France)

Abstract

We develop a simple open-economy AK model with collateral constraints that accounts for growth-reversal episodes, during which countries face abrupt changes in their growth rate that lead to either growth miracles or growth disasters. Absent commitment to investment by the borrowing country, imperfect contract enforcement leads to an informational lag such that the debt contracted upon today depends upon the past stock of capital. The no-commitment delay originates a history effect by which the richer a country has been in the past, the more it can borrow today. For (arbitrarily) small deviations from perfect contract enforcement, the history effect offsets the growth benefits from international borrowing and dampens growth, and it leads to leapfrogging in long-run levels. When large enough, the history effect originates growth reversals and we connect the latter to leapfrogging. Finally, we argue that the model accords with the reported evidence on growth disasters and growth accelerations. We also provide examples showing that leapfrogging and growth reversals may coexist, so that currently poor but fastgrowing countries experiencing sharp growth reversals may end up, in the long-run, significantly richer than currently rich but declining countries.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2010038.

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Length: 30
Date of creation: 02 Nov 2010
Date of revision:
Handle: RePEc:ctl:louvir:2010038

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Keywords: Growth Reversals; Leapfrogging; International Borrowing; Open Economies;

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  1. Romain Ranciere & Aaron Tornell & Frank Westermann, 2005. "Systemic Crises and Growth," NBER Working Papers 11076, National Bureau of Economic Research, Inc.
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Cited by:
  1. Raouf Boucekkine & Giorgio Fabbri & Patrick-Antoine Pintus, 2011. "On the optimal control of a linear neutral differential equation arising in economics," Working Papers halshs-00576770, HAL.
  2. Mauro Bambi & Omar Licandro, 2011. "Endogenous Growth and Wave-Like Business Fluctuation," Working Papers 533, Barcelona Graduate School of Economics.

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