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Economic growth with incomplete financial discipline

  • Bessenyei, István
  • Horváth, Márton
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    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.

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    File URL: http://mpra.ub.uni-muenchen.de/40358/1/MPRA_paper_40358.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40358.

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    Date of creation: 2012
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    Handle: RePEc:pra:mprapa:40358
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    Web page: http://mpra.ub.uni-muenchen.de

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    1. Jordi Gali & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations: How Well Does the RBS Model Fit Postwar U.S. Data?," NBER Working Papers 10636, National Bureau of Economic Research, Inc.
    2. Miles S. Kimball & John G. Fernald & Susanto Basu, 2006. "Are Technology Improvements Contractionary?," American Economic Review, American Economic Association, vol. 96(5), pages 1418-1448, December.
    3. Bródy, András, 2002. "Gazdasági számvetés. Tőkék és áramlatok
      [Economic accounting. Sums and flows of capital]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 943-959.
    4. Galí, Jordi & Rabanal, Pau, 2004. "Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Post-War US Data?," CEPR Discussion Papers 4522, C.E.P.R. Discussion Papers.
    5. Mauro, Paolo, 1998. "Corruption and the composition of government expenditure," Journal of Public Economics, Elsevier, vol. 69(2), pages 263-279, June.
    6. Bródy, András, 2003. "Arány, ütem és forma. A ciklusok alaktanához
      [Proportion, pace and shape. Towards a morphology of cycles]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 136-151.
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