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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
Handle: RePEc:cea:doctra:e2004_08
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  3. Chiappori, Pierre Andre & Guesnerie, Roger, 1991. "Sunspot equilibria in sequential markets models," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 32, pages 1683-1762 Elsevier.
  4. Dirk Krueger & Fabrizio Perri, 1999. "Risk Sharing: Private Insurance Markets or Redistributive Taxes?," Working Papers 99-04, New York University, Leonard N. Stern School of Business, Department of Economics.
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