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Title:Growth and business cycles with imperfect credit markets PDF Logo
Authors:Chakrabarty, Debajyoti
Issue Date:2002
Series/Report no.:ZEI working paper B 29A-2002
Abstract:We study the process of growth and business cycles in an open economy which has access to international ¯nancial markets. The ¯nancial market imperfection originates from costly state veri¯cation and a positive probability of default on loans. The degree of credit market imperfection is endogenously derived. The results show that developed economies are able to borrow on easier terms than emerging countries. The credit market imperfection may cause some economies to fall into a development trap if the initial endowment of capital is too low. The ¯nancial market frictions also generate interesting business cycle dynamics. Financial market imperfections help in replicating the empirical fact that output growth shows positive autocorrelation at short horizons. The model also predicts that a poorer economy will experience a more severe and persistent e®ect on investment and output due to an exogenous shock.
Subjects:Costly state verification
Credit markets
Business Cycles
Document Type:Working Paper
Appears in Collections:ZEI Working Papers, Zentrum für Europäische Integrationsforschung, Universität Bonn

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