The Effects of Households’ and Firms’ Borrowing Constraints on Economic Growth

Conceição Pereira ()
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Conceição Pereira: GEMF and Faculdade de Economia, Universidade de Coimbra

No 2003-04, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: This paper considers an endogenous growth model with asymmetric information between lenders and borrowers, that leads to credit-rationing a proportion of borrowers. However, in contrast to the existing literature, both firms and consumers in this model face borrowing constraints. Nonetheless, the borrowing constraints facing a firm and those encountered by a consumer have opposing effects on growth. Relaxing borrowing constraints on firms is growth-promoting as more funds become available for productive investment. In contrast, relaxing borrowing constraints facing consumers has a detrimental effect as funds are diverted from productive investment to consumption. Such an adverse effect offsets the externality effect present in the production function that would otherwise ensure perpetual growth. Furthermore, it is shown that the interaction between households’ and firms’ borrowing constraints may give rise to endogenous cycles.

Pages: 30 pages
Date: 2003
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Published in Portuguese Economic Journal 7(1): 1-16, 2008

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