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Growth and Crisis, Unavoidable Connection?

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  • Roberto Piazza

Abstract

In emerging economies periods of rapid growth and large capital inflows can be followed by sudden stops and financial crises. I show that, in the presence of financial markets imperfections, a simple modification of a neoclassical growth model can account for these facts. I study a growth model for a small open economy where decreasing marginal returns to capital appear only after the country has reached a threshold level of development, which is uncertain. Limited enforceability of contracts allows default on international debt. International investors optimally choose to suddenly restrict lending when the appearance of decreasing marginal returns slows down growth. The economy defaults and enters a financial crisis.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/267.

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Length: 33
Date of creation: 01 Nov 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/267

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Related research

Keywords: Capital inflows; Credit restraint; Debt sustainability; Economic growth; Economic models; Emerging markets; External borrowing; growth rate; gdp growth; capital stock; business cycles; capital controls; business cycle; growth model; capital flows; capital accumulation; gdp growth rate; capital growth; capital control; growth rates; capital movements; neoclassical growth model; capital mobility; current account deficits; exogenous shocks; capital flow; capital growth rates; debt stock; short-term capital; growth rate of output; access to international financial markets; capital accounts; growth cycles; capital growth rate;

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Cited by:
  1. Jo\~ao P. da Cruz & Pedro G. Lind, 2011. "The dynamics of financial stability in complex networks," Papers 1103.0717, arXiv.org, revised Jan 2013.

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