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Economic growth with incomplete financial discipline

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  • Bessenyei, István
  • Horváth, Márton
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    Abstract

    We introduce soft budget constraint and stop-go policy into a stable two-sector AK macro-model. As the extended model does not have any fixed point, we use computer-simulation to examine the dynamic behaviour of the model. We show that depending on the starting position and the parameter values, the economy can follow a path leading to the collapse or moves oscillatory avoiding the downfall. Further on, we demonstrate that the partial shortage of financial discipline leads to wrong investment decisions which slow the process of capital accumulation. The macroeconomic path directed to the collapse can be reversed by strengthening the financial discipline, keeping down corruption, modification of preferences in investment policy or exogenous technological change.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40358.

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    Date of creation: 2012
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    Handle: RePEc:pra:mprapa:40358

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    Keywords: chaotic dynamics; simulation; bribe;

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    1. Miles S. Kimball & John G. Fernald & Susanto Basu, 2006. "Are Technology Improvements Contractionary?," American Economic Review, American Economic Association, vol. 96(5), pages 1418-1448, December.
    2. Jordi Galí & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations," IMF Working Papers 04/234, International Monetary Fund.
    3. Bródy, András, 2002. "Gazdasági számvetés. Tőkék és áramlatok
      [Economic accounting. Sums and flows of capital]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 943-959.
    4. Bródy, András, 2003. "Arány, ütem és forma. A ciklusok alaktanához
      [Proportion, pace and shape. Towards a morphology of cycles]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 136-151.
    5. Mauro, Paolo, 1998. "Corruption and the composition of government expenditure," Journal of Public Economics, Elsevier, vol. 69(2), pages 263-279, June.
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