Growth and Crisis, Unavoidable Connection?

Author/Editor:

Roberto Piazza

Publication Date:

November 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:

In emerging economies periods of rapid growth and large capital inflows can be followed by sudden stops and financial crises. I show that, in the presence of financial markets imperfections, a simple modification of a neoclassical growth model can account for these facts. I study a growth model for a small open economy where decreasing marginal returns to capital appear only after the country has reached a threshold level of development, which is uncertain. Limited enforceability of contracts allows default on international debt. International investors optimally choose to suddenly restrict lending when the appearance of decreasing marginal returns slows down growth. The economy defaults and enters a financial crisis.

Series:

Working Paper No. 10/267

Subject:

English

Publication Date:

November 1, 2010

ISBN/ISSN:

9781455210749/1018-5941

Stock No:

WPIEA2010267

Format:

Paper

Pages:

33

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