Growth and business cycles with imperfect credit markets

Debajyoti Chakrabarty

No B 29A-2002, ZEI Working Papers from University of Bonn, ZEI - Center for European Integration Studies

Abstract: We study the process of growth and business cycles in an open economy which has access to international ¯nancial markets. The ¯nancial market imperfection originates from costly state veri¯cation and a positive probability of default on loans. The degree of credit market imperfection is endogenously derived. The results show that developed economies are able to borrow on easier terms than emerging countries. The credit market imperfection may cause some economies to fall into a development trap if the initial endowment of capital is too low. The ¯nancial market frictions also generate interesting business cycle dynamics. Financial market imperfections help in replicating the empirical fact that output growth shows positive autocorrelation at short horizons. The model also predicts that a poorer economy will experience a more severe and persistent e®ect on investment and output due to an exogenous shock.

Keywords: Costly state verification; Credit markets; Growth; Business Cycles (search for similar items in EconPapers)
JEL-codes: D82 G14 G21 O16 (search for similar items in EconPapers)
Date: 2002
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Related works:
Working Paper: Growth and Business Cycles with Imperfect Credit Markets (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zeiwps:b29a2002

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