Growth and Crisis, Unavoidable Connection?

Roberto Piazza

Review of Economic Dynamics, 2014, vol. 17, issue 4, 677-706

Abstract: Periods of economic boom with rapid credit and GDP growth can be followed by sudden busts. In the presence of financial markets imperfections, a simple modification of a neoclassical growth model can fully account for this behavior. I study a growth model for a small open economy where decreasing marginal returns to capital appear after the country has reached a threshold level of development, which is uncertain. Limited enforceability of contracts allows borrowers to default on their debt. Lenders optimally choose to suddenly restrict the supply of credit when the threshold is reached and decreasing marginal returns appear. Borrowers default, and a boom-bust cycle is generated. (Copyright: Elsevier)

Keywords: Growth; Boom-bust cycle; Sudden stop; Default; Financial crisis (search for similar items in EconPapers)
JEL-codes: F32 F34 O41 O47 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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DOI: 10.1016/j.red.2014.02.003

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