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Endogenous Financial Development and Multiple Growth Regimes

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Abstract

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.

Suggested Citation

  • Costas Azariadis & Leo Kaas, 2004. "Endogenous Financial Development and Multiple Growth Regimes," Economic Working Papers at Centro de Estudios Andaluces E2004/08, Centro de Estudios Andaluces.
  • Handle: RePEc:cea:doctra:e2004_08
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    More about this item

    Keywords

    Endogenous growth; Limited enforcement; Credit constraints; Indeterminacy.;

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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