Arbeitspapier

Capital Markets and the Instability of Open Economies

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 one tradeable and one non-tradeable good with the non-tradeable being an input to the production of the tradeable. We also assume that firms face credit constraints, with the constaint being tighter at a lower level of financial development. The two basic implications of this model are the following: first, 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 persistenst effects and also in the sense that these economies can exhibit stable limit cycles. Thus, countries that are going through a phase of financial development may become more unstable in the short run. Second, in economies at an intermediate level of financial development, full financial liberalization my actually destabilize the economy. On the other hand, foreign direct investment does not destabilize.

Language
Englisch

Bibliographic citation
Series: Working Paper ; No. 99.01

Classification
Wirtschaft
Subject
Finanzmarktregulierung
Wirtschaftskrise
Volatilität
Schock
Auslandsinvestition
Theorie

Event
Geistige Schöpfung
(who)
Aghion, Philippe
Bacchetta, Philippe
Banerjee, Abhijit
Event
Veröffentlichung
(who)
Swiss National Bank, Study Center Gerzensee
(where)
Gerzensee
(when)
2000

Handle
Last update
10.03.2025, 11:44 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Aghion, Philippe
  • Bacchetta, Philippe
  • Banerjee, Abhijit
  • Swiss National Bank, Study Center Gerzensee

Time of origin

  • 2000

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