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Economic growth with incomplete financial discipline

Author

Listed:
  • Bessenyei, István
  • Horváth, Márton

Abstract

We introduce soft budget constraint and stop-go policy into a stable two-sector AK macro-model. As the extended model does not have any fixed point, we use computer-simulation to examine the dynamic behaviour of the model. We show that depending on the starting position and the parameter values, the economy can follow a path leading to the collapse or moves oscillatory avoiding the downfall. Further on, we demonstrate that the partial shortage of financial discipline leads to wrong investment decisions which slow the process of capital accumulation. The macroeconomic path directed to the collapse can be reversed by strengthening the financial discipline, keeping down corruption, modification of preferences in investment policy or exogenous technological change.

Suggested Citation

  • Bessenyei, István & Horváth, Márton, 2012. "Economic growth with incomplete financial discipline," MPRA Paper 40358, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:40358
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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