Credit Constraints, Growth and Inequality Dynamics

Yoseph Getachew
Authors registered in the RePEc Author Service: Hossein Asgharian and Charlotte Christiansen

No 201672, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper examines how credit constraints affect the dynamics of wealth and thereby the dynamics of capital and output growth. We develop standard Ak growth models that display transitional dynamics, contrary to general belief, once the complete credit markets assumption is relaxed. The mechanism is that credit constraints make individual productivity differences persist, which in turn leads to the persistence of income inequality. The dynamics of inequality is jointly determined with the dynamics of aggregate capital. The economy thus passes through a transitional period of inequality, individual and aggregate capital dynamics before it converges to a long-run balanced growth path. The application of the model to the analysis of intergenerational mobility and inequality dynamics suggests substantial economic and policy significance. In particular, introducing credit constraints to the Barro Ak model, public investment could have an indirect impact on growth via its effect on inequality and mobility.

Pages: 12 pages
Date: 2016-10
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (5)

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Journal Article: Credit constraints, growth and inequality dynamics (2016)
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