Capital Markets and the Instability of Open Economies
AbstractThis paper introduces a framework for analyzing the role of financial factors as a source of stability in small open economies. Our basic model is a dynamic open economy with a tradeable good produced with capital and a country-specific factor. We also assume that firms face credit constraints, with the constraint being tighter at a lower level of financial development. A basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies. This is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles. Thus, countries that are going through a phase of financial development may become more unstable in the short run. Similarly, in economies at a intermediate level of financial development, full capital account liberalization may destabilize the economy. On the other hand, foreign direct investment does not destabilize.
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Bibliographic InfoPaper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 99.01 update.
Length: 46 pages
Date of creation: Nov 2000
Date of revision:
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Other versions of this item:
- Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1999. "Capital Markets and the Instability of Open Economies," Working Papers 99.01, Swiss National Bank, Study Center Gerzensee.
- Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 1999. "Capital Markets and the Instability of Open Economies," CEPR Discussion Papers 2083, C.E.P.R. Discussion Papers.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-01-21 (All new papers)
- NEP-DGE-2000-12-19 (Dynamic General Equilibrium)
- NEP-FMK-2001-01-21 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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