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Exploring The Role of Limited Commitment Constraints in Argentina’s "Missing Capital"

Carlos Zarazaga, Marek Kapicka and Finn Kydland

No 4610, Asociación Argentina de Economía Política: Working Papers from Asociación Argentina de Economía Política

Abstract: The paper investigates why capital accumulation in Argentina was weaker in the 1990s and 2000s than suggested by the high productivity growth rates and low international interest rates prevailing then. It is shown that lack of commitment to honor contractual obligations with foreign investors introduces two mechanisms that account for that puzzling capital accumulation dynamics. First, the response of investment to a total factor productivity increase is muted and short-lived, while the response to a decrease is large and persistent. Second, unlike in an economy with commitment, low international interest rates may reduce capital accumulation, because they increase the relevance of future commitment constraints. A quantitative implementation of a canonical open economy model with limited commitment constraints shows that the two mechanisms are very important to understand the evolution of Argentina’s capital stock over time. The model accounts for virtually all the capital missing from Argentina in the period 1980-2019, relative to that which would have been observed in the absence of the limited commitment friction.

JEL-codes: F34 F41 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2022-11
New Economics Papers: this item is included in nep-dge and nep-opm
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