Growth and Financial Liberalization under Capital Collateral Constraints: The Striking Case of the Stochastic AK model with CARA Preferences

Boucekkine, Raouf; Fabbri, Giorgio; Pintus, Patrick

Growth and Financial Liberalization under Capital Collateral Constraints: The Striking Case of the Stochastic AK model with CARA Preferences

Raouf Boucekkine (), Giorgio Fabbri and Patrick Pintus

Abstract: We consider a small-open, collateral-constrained AK economy. We show that the combination of CARA preferences and uncertainty on capital inflows in such an economy generates long-term (expected) growth while the deterministic counterpart does not. In this framework, long-term growth is entirely driven by precautionary savings. In particular, we show that the asymptotic growth rate of the expected capital stock is an increasing function of both the risk parameter and the Arrow-Prat absolute risk aversion parameter. The model also predicts that economies that are more financially integrated through international borrowing experience lower consumption growth volatility relative to output growth volatility.

Keywords: CARA preferences; growth; financial liberalization; collateral constraints; precautionary savings (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-dge and nep-fdg
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