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Federal Reserve Bank of St. Louis
Working Papers
Endogenous Borrowing Constraints and Stagnation in Latin America
Paulina Restrepo-Echavarria
Abstract

The Latin American debt crisis of the 1980's had a major and long lasting effect on per-capita consumption: its level in 2005 was not that different from that in 1980. This paper studies the long stagnation in per-capita consumption that followed the crisis, and its relationship with recessions and sovereign risk, using a small open economy real business cycle model with complete markets, endogenous borrowing limits (limited commitment), endogenous capital accumulation, and domestic productivity and international interest rate shocks. I find that the model does an excellent job at explaining the observed behavior of per-capita consumption and that both the productivity and international interest rate shocks are important. Furthermore, I show that the participation constraint in this kind of representative agent model can bind not only in good times but also in prolonged bad times.


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Paulina Restrepo-Echavarria, Endogenous Borrowing Constraints and Stagnation in Latin America, Federal Reserve Bank of St. Louis, Working Papers 2014-37, 15 Feb 2013, revised 01 Oct 2019.
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Subject headings:
Keywords: Consumption; Debt Crisis; Latin America; Limited Commitment
DOI: 10.20955/wp.2014.037
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