scholarly journals Endogenous Instability in Credit-Constrained Emerging Economies with Leontief Technology

2008 ◽  
Vol 2008 ◽  
pp. 1-16
Author(s):  
Cristiana Mammana ◽  
Elisabetta Michetti
Keyword(s):  
Open Economy ◽  
Emerging Economies ◽  
Complex Dynamics ◽  
Small Open Economy ◽  
Capital Inflows ◽  
Border Collision Bifurcations ◽  
Mobile Capital ◽  
Increase Risk ◽  
Bifurcation And Stability

This work provides a framework to analyze the role of financial development as a source of endogenous instability in emerging economies subject to moral hazard problems. We propose and study a dynamic model describing a small open economy with a tradeable good produced by internationally mobile capital and a country specific input, using Leontief technology. We demonstrate that emerging markets could be endogenously unstable since large capital inflows increase risk and exacerbate asymmetric information problems, according to empirical evidences. Using bifurcation and stability analysis, we describe the properties of the system attractors, we assess the plausibility for complex dynamics and, we find out that border collision bifurcations can emerge due to the fact that the state space is piecewise smooth. As a consequence, when a fixed or periodic point loses its stability, the final dynamics may become suddenly chaotic. This fact may explain how financial crises occurred in emerging economies.

scholarly journals Interest Rates, Leverage, and Business Cycles in Emerging Economies: The Role of Financial Frictions

2015 ◽  
Vol 7 (3) ◽  
pp. 153-188 ◽  
Author(s):  
Andrés Fernández ◽  
Adam Gulan
Keyword(s):  
Business Cycles ◽  
Interest Rates ◽  
Open Economy ◽  
Emerging Economies ◽  
Financial Frictions ◽  
Small Open Economy ◽  
Financial Data ◽  
Cycle Model ◽  
Business Cycle Model

Countercyclical country interest rates have been shown to be an important characteristic of business cycles in emerging markets. In this paper we provide a microfounded rationale for this pattern by linking interest rate spreads to the dynamics of corporate leverage. For this purpose we embed a financial accelerator into a business cycle model of a small open economy and estimate it on a novel panel dataset for emerging economies that merges macroeconomic and financial data. The model accounts well for the empirically observed countercyclicality of interest rates and leverage, as well as for other stylized facts. (JEL E13, E32, E43, E44, F41, O11)

Crises and capital controls in small open economies: a stock–flow consistent approach

2019 ◽  
Vol 16 (1) ◽  
pp. 94-133
Author(s):  
Hamid Raza ◽  
Bjorn Runar Gudmundsson ◽  
Gylfi Zoega ◽  
Mikael Randrup Byrialsen
Keyword(s):  
Open Economy ◽  
Small Open Economy ◽  
Capital Controls ◽  
Capital Inflows ◽  
Policy Implications ◽  
Small Open Economies ◽  
Financial Flows ◽  
Small Economy ◽  
Stock Flow

This paper attempts to explain the role of capital inflows in creating economic booms and busts in a small open economy with sovereign currency. We develop a stock–flow consistent (SFC) model for a small open economy while relying on the experience of the Icelandic crisis. We demonstrate the destabilising effects of capital inflows on the economy by allowing for a sudden stop, and also discuss the role of capital controls as a policy response in the event of a crisis due to sudden stops. Finally, we discuss the policy implications of our results in order to tackle the destabilising effects associated with financial flows in a small economy.

Crises and capital controls in small open economies: a stock–flow consistent approach

2019 ◽  
Vol 16 (1) ◽  
pp. 94-133
Author(s):  
Hamid Raza ◽  
Bjorn Runar Gudmundsson ◽  
Gylfi Zoega ◽  
Mikael Randrup Byrialsen
Keyword(s):  
Open Economy ◽  
Small Open Economy ◽  
Capital Controls ◽  
Capital Inflows ◽  
Policy Implications ◽  
Small Open Economies ◽  
Financial Flows ◽  
Small Economy ◽  
Stock Flow

This paper attempts to explain the role of capital inflows in creating economic booms and busts in a small open economy with sovereign currency. We develop a stock–flow consistent (SFC) model for a small open economy while relying on the experience of the Icelandic crisis. We demonstrate the destabilising effects of capital inflows on the economy by allowing for a sudden stop, and also discuss the role of capital controls as a policy response in the event of a crisis due to sudden stops. Finally, we discuss the policy implications of our results in order to tackle the destabilising effects associated with financial flows in a small economy.

Liquidity constraints, international trade, and optimal monetary policy

2017 ◽  
Vol 20 (2) ◽  
Author(s):  
Wai-Ming Ho
Keyword(s):  
Open Economy ◽  
Small Open Economy ◽  
Capital Requirements ◽  
Capital Inflows ◽  
Working Capital ◽  
Tax Rate ◽  
Friedman Rule ◽  
Domestic Credit ◽  
International Borrowing ◽  
The Government

AbstractThe availability of liquidity matters for an economy’s production and trade as firms need working capital to finance their operations. This paper studies the interaction between trade and capital flows operating through the liquidity allocations in the financial markets using a small-open-economy, overlapping-generations model. Working capital requirements distort the intratemporal consumption allocations. International capital inflows help easing liquidity in the domestic credit market, facilitating trade and improving the intratemporal allocation, while distorting the intertemporal allocation of the economy. We show how the government can use the Friedman rule and differentiated consumption taxes to address the tradeoff between the intratemporal and intertemporal distortions and achieve the second best optimum. Imposing a higher tax rate on imports can reduce the international borrowing to imports ratio and enhance the efficiency in using capital inflows to facilitate trade flows.

scholarly journals Risk Matters: The Real Effects of Volatility Shocks

2011 ◽  
Vol 101 (6) ◽  
pp. 2530-2561 ◽  
Author(s):  
Jesús Fernández-Villaverde ◽  
Pablo Guerrón-Quintana ◽  
Juan F Rubio-Ramírez ◽  
Martin Uribe
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Open Economy ◽  
Emerging Economies ◽  
Real Interest Rate ◽  
Small Open Economy ◽  
Real Interest Rates ◽  
The Real ◽  
Interest Rate Volatility ◽  
Business Cycle Model

We show how changes in the volatility of the real interest rate at which small open emerging economies borrow have an important effect on variables like output, consumption, investment, and hours. We start by documenting the strong evidence of time-varying volatility in the real interest rates faced by four emerging economies: Argentina, Brazil, Ecuador, and Venezuela. We estimate a stochastic volatility process for real interest rates. Then, we feed this process in a standard small open economy business cycle model. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, hours, and debt. (JEL E13, E20, E32, E43, F32, F43, 011)

scholarly journals Trade in Commodities and Business Cycle Volatility

2021 ◽  
Vol 13 (3) ◽  
pp. 173-208
Author(s):  
David Kohn ◽  
Fernando Leibovici ◽  
Håkon Tretvoll
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Emerging Economies ◽  
Small Open Economy ◽  
Commodity Price ◽  
Cross Sectional ◽  
Developed Economies ◽  
Show Evidence ◽  
The Business Cycle ◽  
Sectoral Trade Flows

This paper studies the role of differences in the patterns of production and international trade on the business cycle volatility of emerging and developed economies. We study a multisector small open economy in which firms produce and trade commodities and manufactures. We estimate the model to match key cross-sectional and time-series differences across countries. Emerging economies run trade surpluses in commodities and trade deficits in manufactures, while sectoral trade flows are balanced in developed economies. We find that these differences amplify the response of emerging economies to commodity price fluctuations. We show evidence consistent with this mechanism using cross-country data. (JEL E23, E32, F14, F41, F44)

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