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Financial liberalization: Poverty trap or chaos

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  • Kikuchi, Tomoo
  • Vachadze, George

Abstract

We construct an overlapping generations model in which people are subject to limited pledgeability and uncertainty over entrepreneurial projects. We show that whether financial liberalization generates a poverty trap, an endogenous fluctuation, or both depends on the interaction of pledgeability and uncertainty. Endogenous fluctuation requires a high level of both pledgeability and uncertainty. Poverty trap requires a low level of both. For an intermediate level of both, the initially poor are trapped in poverty while the initially rich fluctuate endogenously.

Suggested Citation

  • Kikuchi, Tomoo & Vachadze, George, 2015. "Financial liberalization: Poverty trap or chaos," Journal of Mathematical Economics, Elsevier, vol. 59(C), pages 1-9.
  • Handle: RePEc:eee:mateco:v:59:y:2015:i:c:p:1-9
    DOI: 10.1016/j.jmateco.2015.04.005
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