Financial development and the instability of open economies
By: Philippe Aghion, Philippe Bacchetta, Abhijit Banerjee.
Contributors: Bacchetta, Philippe.; Banerjee, Abhijit V.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10246; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10246.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: States, Small -- Economic conditions -- Econometric models.; Finance -- Econometric models.; Free trade -- Econometric models.
Description: "This paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies.  Our basic model is a dynamic open economy model with a tradeable good produced with capital and a country-specific factor.  We also assume that firms face credit constraints, with the constraint being tighter at a lower level of financial development.  A basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies.  This is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles.  Thus, countries that are going through a phase of financial development may become more unstable in the short run.  Similarly, full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development: phases of growth with capital inflows are followed by collapse with capital outflows.  On the other hand, foreign direct investment does not destabilize"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
Title from PDF file as viewed on 1/21/2005.
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.