Growth and Capital Flows with Risky Entrepreneurship

Author/Editor:

Damiano Sandri

Publication Date:

February 1, 2010

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 10/37

Subject:

English

Publication Date:

February 1, 2010

ISBN/ISSN:

9781451962802/1018-5941

Stock No:

WPIEA2010037

Format:

Paper

Pages:

27

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