Growth and Capital Flows with Risky Entrepreneurship
February 1, 2010
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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.
Subject: Balance of payments, Capital outflows, Financial markets, Financial sector development, Income, Labor, National accounts, Self-employment, Wages
Keywords: Capital Flows, Capital outflows, depreciation rate, Eastern Europe, economy dynamics, failure risk, Financial Development, financial market imperfection, Financial sector development, Growth, idiosyncratic risk, Income, interest rate, Investment Risk, market-clearing wage, open economy, production function, risk sharing, Saving, saving rate, Self-employment, Wages, WP
Pages:
27
Volume:
2010
DOI:
Issue:
037
Series:
Working Paper No. 2010/037
Stock No:
WPIEA2010037
ISBN:
9781451962802
ISSN:
1018-5941
