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Chaotic dynamics in credit constrained emerging economies

  • Caballe, Jordi
  • Jarque, Xavier
  • Michetti, Elisabetta

This paper analyzes the role of financial development as a source of endogenous instability in small open economies. By assuming that firms face credit constraints, our model displays a complex dynamic behavior for intermediate values of the parameter representing the level of financial development of the economy. The basic implication of our model is that economies experiencing a process of financial development are more unstable than both very underdeveloped and very developed economies. Our instability concept means that small shocks have a persistent effect on the long run behavior of the model and also that economies can exhibit cycles with a very high period or even chaotic dynamic patterns.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165-1889(05)00116-8
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 30 (2006)
Issue (Month): 8 (August)
Pages: 1261-1275

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Handle: RePEc:eee:dyncon:v:30:y:2006:i:8:p:1261-1275
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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