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Endogenous Financial Development and Multiple Growth Regimes

The paper analyzes a linear growth model with idiosyncratic productivity shocks and self-enforcing loan contracts. Agents cannot commit to repay their loans because of insuficient collateral, but the threat of credit market exclusion prevents agents from default. Credit repayment is enforced by endogenously specified credit constraints that are imposed on each agent at each point in time. There is a dynamic complementarity between these credit constraints that gives rise to multiple balanced-growth paths. A high-growth equilibrium with developed credit markets can coexist with one or two low-growth equilibria with underdeveloped credit markets. Moreover, low-growth equilibria are more volatile since they are exposed to shocks to the wealth distribution and to sunspot shocks.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2004/08.

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Length: 35 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:cea:doctra:e2004_08
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  1. repec:att:wimass:9419 is not listed on IDEAS
  2. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  3. Greenwood, Jeremy & Jovanovic, Boyan, 1988. "Financial Development, Growth, And The Distribution Of Income," Working Papers 88-12, C.V. Starr Center for Applied Economics, New York University.
  4. Acemoglu, Daron & Zilibotti, Fabrizio, 1996. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," CEPR Discussion Papers 1426, C.E.P.R. Discussion Papers.
  5. Cevdet Denizer & Murat F. Lyigun & Ann L. Owen, 2000. "Finance and macroeconomic volatility," International Finance Discussion Papers 670, Board of Governors of the Federal Reserve System (U.S.).
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  9. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
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  11. Koeppl, Thorsten Volker, 2004. "Risk sharing through financial markets with endogenous enforcement of trades," Working Paper Series 0319, European Central Bank.
  12. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  13. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  14. Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 595-609, October.
  15. Azariadis, Costas & Chakraborty, Shankha, 1999. "Agency Costs in Dynamic Economic Models," Economic Journal, Royal Economic Society, vol. 109(455), pages 222-41, April.
  16. Steven N. Durlauf & Danny T. Quah, 1998. "The New Empirics of Economic Growth," Working Papers 98-01-012, Santa Fe Institute.
  17. Azariadis, Costas & Kaas, Leo, 2007. "Asset price fluctuations without aggregate shocks," Journal of Economic Theory, Elsevier, vol. 136(1), pages 126-143, September.
  18. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  19. Dirk Krueger & Fabrizio Perri, 1999. "Risk sharing: private insurance markets or redistributive taxes?," Staff Report 262, Federal Reserve Bank of Minneapolis.
  20. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Papers 411, Stockholm - International Economic Studies.
  21. Chiappori, P.A. & Guesnerie, R., 1990. "Sunspot Equilibria in Sequential Markets Models," DELTA Working Papers 90-05, DELTA (Ecole normale supérieure).
  22. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  23. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
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