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Nonlinear dynamics in a model of financial development with a risk premium

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  • Gomes, Orlando

Abstract

The relation between the degree of financial development of an economy (measured by the extent in which constraints to credit exist) and fluctuations affecting the trend of economic growth, is a relevant theme of discussion in macroeconomics. Some of the literature on this field argues that the cyclical behaviour is generated endogenously, under the model’s assumptions, for specific levels of credit availability. Following this line of reasoning, the paper develops a theoretical framework that places a risk premium over the international interest rate as the centre piece of the explanation for the occurrence of endogenous business cycles, under particular levels of financial development. The risk premium penalizes the borrowing capacity of the less wealth endowed countries. The analysis explores both local and global dynamics.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2887.

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Date of creation: Feb 2007
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Handle: RePEc:pra:mprapa:2887

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Keywords: Financial development; Credit constraints; Risk premia; Endogenous business cycles; Nonlinear dynamics; Chaos;

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