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Endogenous borrowing constraints and stagnation in Latin America

Paulina Restrepo-Echavarria

Journal of Economic Dynamics and Control, 2019, vol. 109, issue C

Abstract: The Latin American debt crisis of the 1980’s had a major and long-lasting effect on per-capita consumption: its level in 2005 was not that different from that in 1980. This paper studies the long stagnation in per-capita consumption that followed the crisis, and its relationship with recessions and sovereign risk, using a small open economy real business cycle model with complete markets, endogenous borrowing limits (limited commitment), endogenous capital accumulation, and domestic productivity and international interest rate shocks. I find that the model does an excellent job at explaining the observed behavior of per-capita consumption and that both the productivity and international interest rate shocks are important. Furthermore, I show that the participation constraint in this kind of representative agent model can bind not only in good times but also in prolonged bad times.

Date: 2019
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Related works:
Working Paper: Endogenous Borrowing Constraints and Stagnation in Latin America (2013) Downloads
Working Paper: Endogenous Borrowing Constraints and Stagnation in Latin America (2010) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:109:y:2019:i:c:s016518891930171x

DOI: 10.1016/j.jedc.2019.103774

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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