Fed in Print

Abstract

Latin America has had striking changes in economic performance over time. Following the recession and debt crises of the early 1980’s, per-capita consumption declined for about ten years; in the year 2004, it was not that different from what it was in 1980. This paper studies consumption stagnation in Latin America using a small open economy real business cycle model with endogenous borrowing limits, endogenous capital accumulation and domestic productivity growth, and international interest rate shocks. I find that the model does an excellent job matching the observed behavior of per-capita consumption and that the interaction of both productivity and international interest rate shocks with the borrowing limit is key. Furthermore I show that, unlike conventional wisdom, the participation constraint in this kind of model can bind not only in good times but also in prolonged bad times.

JEL Classification:

C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

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