Financial liberalization: Poverty trap or chaos

Tomoo Kikuchi and George Vachadze

Journal of Mathematical Economics, 2015, vol. 59, issue C, 1-9

Abstract: We construct an overlapping generations model in which people are subject to limited pledgeability and uncertainty over entrepreneurial projects. We show that whether financial liberalization generates a poverty trap, an endogenous fluctuation, or both depends on the interaction of pledgeability and uncertainty. Endogenous fluctuation requires a high level of both pledgeability and uncertainty. Poverty trap requires a low level of both. For an intermediate level of both, the initially poor are trapped in poverty while the initially rich fluctuate endogenously.

Keywords: Financial liberalization; Endogenous cycles; Chaos; Financial frictions; Uninsurable risks (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:59:y:2015:i:c:p:1-9

DOI: 10.1016/j.jmateco.2015.04.005

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