Growth and Capital Flows with Risky Entrepreneurship

Damiano Sandri

No 2010/037, IMF Working Papers from International Monetary Fund

Abstract: This paper shows that the behavior of entrepreneurs facing incomplete financial markets and risky investment can explain why growth accelerations in developing countries tend to be associated with current account improvements. The uninsurable risk of losing invested capital forces entrepreneurs to rely on self-financing, so that when business opportunities open up entrepreneurs increase saving to finance the investment that produces growth. The key insight is that saving has to rise more than investment to allow also for the accumulation of precautionary assets. Plausibly calibrated simulations show that this net saving increase can sustain large and persistent net capital outflows.

Keywords: WP; open economy; interest rate; Investment Risk; Saving; Capital Flows; Financial Development; Growth; risk sharing; depreciation rate; failure risk; market-clearing wage; idiosyncratic risk; saving rate; economy dynamics; production function; financial market imperfection; Self-employment; Capital outflows; Income; Financial sector development; Wages; Eastern Europe (search for similar items in EconPapers)
Pages: 27
Date: 2010-02-01
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Citations: View citations in EconPapers (92)

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Related works:
Journal Article: Growth and Capital Flows with Risky Entrepreneurship (2014)
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