Endogenous Financial Development and Multiple Growth Regimes

Costas Azariadis () and Leo Kaas ()

No E2004/08, Economic Working Papers at Centro de Estudios Andaluces from Centro de Estudios Andaluces

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.

Keywords: Endogenous growth; Limited enforcement; Credit constraints; Indeterminacy. (search for similar items in EconPapers)
JEL-codes: D92 E32 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mfd
Date: 2004
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Persistent link: http://EconPapers.repec.org/RePEc:cea:doctra:e2004_08

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