IDEAS home Printed from https://ideas.repec.org/a/bpj/sndecm/v16y2012i2n6.html

The Macrodynamics of External Overborrowing and Systemic Instability in a Small Open Economy

Author

Listed:
  • Maggi Bernardo

    (University of Rome La Sapienza)

  • Cavallaro Eleonora

    (University of Rome La Sapienza)

  • Mulino Marcella

    (University of l’Aquila)

Abstract

The paper presents a monetary growth model for a small emerging economy with a currency board arrangement. The integration into global financial markets determines an acceleration of debt-creating capital inflows that boosts growth and the prospect of future profits, and leads to the building-up of large imbalances in the public and private sectors. Financial fragility undermines the state of confidence and determines an endogenous capital reversal. At this stage, the strong commitment to maintain the peg leaves no room for stabilization purposes and leads to systemic instability. We run a continuous-time estimation of the non-linear differential equations system of the model, with reference to Argentina during the years of the currency-board arrangement. We find two steady-state solutions, corresponding to a high-interest rate and a low-interest rate equilibrium, respectively. The local stability and sensitivity analysis show that both equilibria are unstable and that the system is intrinsically fragile. We show that even a tighter fiscal policy, according to the prescriptions of international institutions, results ineffective in improving stability.

Suggested Citation

  • Maggi Bernardo & Cavallaro Eleonora & Mulino Marcella, 2012. "The Macrodynamics of External Overborrowing and Systemic Instability in a Small Open Economy," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(2), pages 1-27, April.
    • Handle: RePEc:bpj:sndecm:v:16:y:2012:i:2:n:6
    DOI: 10.1515/1558-3708.1932
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/1558-3708.1932
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/1558-3708.1932?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
    2. Maggi, Bernardo & Padoan, Pier Carlo & Guerrieri, Paolo, 2009. "A continuous time model of European growth, integration and technology diffusion: The role of distance," Economic Modelling, Elsevier, vol. 26(3), pages 631-640, May.
    3. Thomas Lux & Michele Marchesi, 2000. "Volatility Clustering In Financial Markets: A Microsimulation Of Interacting Agents," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(04), pages 675-702.
    4. Bernardo Maggi & Eleonora Cavallaro & Marcella Mulino, 2010. "Financial Fragility and Currency Crisis: a Macrodynamical Revisitation of the Argentina’s Experience," Working Papers - Dipartimento di Economia 8, Dipartimento di Economia, Sapienza University of Rome, revised 2010.
    5. Morishima,Michio, 1976. "The Economic Theory of Modern Society," Cambridge Books, Cambridge University Press, number 9780521291682, August.
    6. Michael Mussa, 2002. "Argentina and the Fund: From Triumph to Tragedy," Peterson Institute Press: Policy Analyses in International Economics, Peterson Institute for International Economics, number pa67, February.
    7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    8. Mulino, Marcella, 2002. "Currency boards, credibility and crises," Economic Systems, Elsevier, vol. 26(4), pages 381-386, December.
    9. Phillips, P C B, 1991. "Error Correction and Long-Run Equilibrium in Continuous Time," Econometrica, Econometric Society, vol. 59(4), pages 967-980, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Eleonora Cavallaro & Bernardo Maggi, 2014. "State of confidence, overborrowing and the macroeconomic stabilization puzzle," DSS Empirical Economics and Econometrics Working Papers Series 2014/2, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
    2. Eleonora Cavallaro & Bernardo Maggi, 2016. "State of confidence, overborrowing and the macroeconomic stabilization puzzle: a system dynamic approach," Working Papers in Public Economics 174, Department of Economics and Law, Sapienza University of Rome.
    3. Cavallaro, Eleonora & Maggi, Bernardo, 2016. "State of confidence, overborrowing and macroeconomic stabilization in out-of-equilibrium dynamics," Economic Modelling, Elsevier, vol. 59(C), pages 210-223.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cavallaro, Eleonora & Maggi, Bernardo & Mulino, Marcella, 2011. "The macrodynamics of financial fragility within a hard peg arrangement," Economic Modelling, Elsevier, vol. 28(5), pages 2164-2173, September.
    2. A. Ganesh-Kumar & Kunal Sen & Rajendra R. Vaidya, 2002. "Does the source of financing matter? Financial markets, financial intermediaries and investment in India," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(2), pages 211-228.
    3. R. Glenn Hubbard, 1990. "Introduction to "Asymmetric Information, Corporate Finance, and Investment"," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 1-14, National Bureau of Economic Research, Inc.
    4. Bardsen, Gunnar & Klovland, Jan Tore, "undated". "Finding The Right Nominal Anchor: The Cointegration Of Money, Credit And Nominal Income In Norway," Economic Research Papers 268385, University of Warwick - Department of Economics.
    5. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
    6. Georgios Argitis, 2008. "Finance, Investment and Macroeconomic Performance," European Research Studies Journal, European Research Studies Journal, vol. 0(1-2), pages 71-88.
    7. Jean Louis EKOMANE, 2017. "Monetary policy transmission: Does the credit channel perform in Cameroon?," Turkish Economic Review, KSP Journals, vol. 4(4), pages 369-377, December.
    8. Drakos, Konstantinos & Giannakopoulos, Nicholas, 2011. "On the determinants of credit rationing: Firm-level evidence from transition countries," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1773-1790.
    9. Studart, Rogério, 2005. "The State, the markets and development financing," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    10. Giovanni Dosi & Mauro Napoletano & Andrea Roventini & Joseph E. Stiglitz & Tania Treibich, 2020. "Rational Heuristics? Expectations And Behaviors In Evolving Economies With Heterogeneous Interacting Agents," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1487-1516, July.
    11. Nair, Aswathi R & Trivedi, Pushpa L & Padhi, Puja, 2025. "Financial development and inflation targeting: How market structure shapes monetary policy effectiveness," Economic Modelling, Elsevier, vol. 153(C).
    12. Donou-Adonsou, Ficawoyi & Sylwester, Kevin, 2017. "Growth effect of banks and microfinance: Evidence from developing countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 44-56.
    13. Mr. Vassili Prokopenko & Mr. Paul Holden, 2001. "Financial Development and Poverty Alleviation: Issues and Policy Implications for Developing and Transition Countries," IMF Working Papers 2001/160, International Monetary Fund.
    14. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    15. International Monetary Fund, 1991. "Financial Sector Reforms and Monetary Policy," IMF Working Papers 1991/127, International Monetary Fund.
    16. Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Chapters, in: Financial Markets and Financial Crises, pages 69-108, National Bureau of Economic Research, Inc.
    17. García, Teresa & Ocaña Pérez de Tudela, Carlos, 1997. "Restricciones financieras a la inversión causadas por el riesgo de quiebra," DEE - Documentos de Trabajo. Economía de la Empresa. DB 6410, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    18. Aadland, David, 2005. "Detrending time-aggregated data," Economics Letters, Elsevier, vol. 89(3), pages 287-293, December.
    19. Charles W. Calomiris & R. Glenn Hubbard, 1993. "Internal Finance and Investment: Evidence from the Undistributed Profits Tax of 1936-1937," NBER Working Papers 4288, National Bureau of Economic Research, Inc.
    20. Raimundo Soto, "undated". "Nonlinearities in the Demand for money: A Neural Network Approach," ILADES-UAH Working Papers inv107, Universidad Alberto Hurtado/School of Economics and Business.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:sndecm:v:16:y:2012:i:2:n:6. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyterbrill.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.