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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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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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  1. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2000. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," Working Papers 00.07, Swiss National Bank, Study Center Gerzensee.
  2. Michael J. Stutzer, 1980. "Chaotic dynamics and bifurcation in a macro model," Staff Report 55, Federal Reserve Bank of Minneapolis.
  3. Piketty, Thomas & Banerjee, Abhijit & Aghion, Philippe, 1999. "Dualism and Macroeconomic Volatility," Scholarly Articles 4554124, Harvard University Department of Economics.
  4. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
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  9. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1999. "A Simple Model of Monetary Pollicy and Currency Crises," Working Papers 99.05, Swiss National Bank, Study Center Gerzensee.
  10. Benhabib, Jess & Day, Richard H., 1982. "A characterization of erratic dynamics in, the overlapping generations model," Journal of Economic Dynamics and Control, Elsevier, vol. 4(1), pages 37-55, November.
  11. Petrei, A. Humberto & Tybout, James, 1985. "Microeconomic adjustments in Argentina during 1976-1981: The importance of changing levels of financial subsidies," World Development, Elsevier, vol. 13(8), pages 949-967, August.
  12. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "Financial development and the instability of open economies," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1077-1106, September.
  13. Stutzer, Michael J., 1980. "Chaotic dynamics and bifurcation in a macro model," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 353-376, May.
  14. Deneckere, Raymond & Pelikan, Steve, 1986. "Competitive chaos," Journal of Economic Theory, Elsevier, vol. 40(1), pages 13-25, October.
  15. Betty Daniel & John Bailey Jones, 2001. "Financial Liberalization and Banking Crises in Emerging Economies," Discussion Papers 01-04, University at Albany, SUNY, Department of Economics.
  16. Day, Richard H, 1982. "Irregular Growth Cycles," American Economic Review, American Economic Association, vol. 72(3), pages 406-14, June.
  17. Benhabib, Jess & Day, Richard H, 1981. "Rational Choice and Erratic Behaviour," Review of Economic Studies, Wiley Blackwell, vol. 48(3), pages 459-71, July.
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