Endogenous credit market incompleteness: RBC approach to emerging markets crises

Endogenous credit market incompleteness: RBC approach to emerging markets crises Public Deposited

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Creator

Peredriy, Sergiy
- Affiliation: College of Arts and Sciences, Department of Economics

Abstract

An endogenous liquidity constraint is applied to a Small open economy Real Business Cycle model driven by shocks to productivity and the world interest rate. The approach allows the reproduction of distinctive features of the crises in the short run, without introducing significant distortions in the long-term properties of the economy. Two variants of the model are considered: a one-sector model with a single tradable good, and a two-sector model which features tradable and non-tradable goods (both of which are produced). The level of the capital stock was found to have a significant effect on the short-run reaction of the liquidity constrained economy to the shocks in both the one- and two-sector models. For the two-sector economy, the other new effect that is reproduced and analyzed is a significant decrease in the tradables production when the constraint becomes binding. The effect of the tightness of the constraint on the long-term properties of the model is analyzed; the major difference between the models is the direction of the GDP change.

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