Federal Reserve Bank of St. Louis
Endogenous Borrowing Constraints and Stagnation in Latin America
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.
Cite this item
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 08 Feb 2019.
- 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
Keywords: Limited Commitment; per-capita consumption; total factor productivity; interest rate.
This item with handle RePEc:fip:fedlwp:2014-037
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