Economic growth with incomplete financial discipline

István Bessenyei and Márton Horváth

MPRA Paper from University Library of Munich, Germany

Abstract: We introduce soft budget constraint and stop-go policy into a stable two-sector AK macro-model. As the extended model does not have any fixed point, we use computer-simulation to examine the dynamic behaviour of the model. We show that depending on the starting position and the parameter values, the economy can follow a path leading to the collapse or moves oscillatory avoiding the downfall. Further on, we demonstrate that the partial shortage of financial discipline leads to wrong investment decisions which slow the process of capital accumulation. The macroeconomic path directed to the collapse can be reversed by strengthening the financial discipline, keeping down corruption, modification of preferences in investment policy or exogenous technological change.

Keywords: chaotic dynamics; simulation; bribe (search for similar items in EconPapers)
JEL-codes: C63 E63 H54 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-dge
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