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Growth and Crisis, Unavoidable Connection?

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  • Roberto Piazza

    (Banca d'Italia)

Abstract

Periods of economic boom with rapid credit and GDP growth can be followed by sudden busts. In the presence of financial markets imperfections, a simple modification of a neoclassical growth model can fully account for this behavior. I study a growth model for a small open economy where decreasing marginal returns to capital appear after the country has reached a threshold level of development, which is uncertain. Limited enforceability of contracts allows borrowers to default on their debt. Lenders optimally choose to suddenly restrict the supply of credit when the threshold is reached and decreasing marginal returns appear. Borrowers default, and a boom-bust cycle is generated. (Copyright: Elsevier)

Suggested Citation

  • Roberto Piazza, 2014. "Growth and Crisis, Unavoidable Connection?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 677-706, October.
    • Handle: RePEc:red:issued:12-142
    DOI: 10.1016/j.red.2014.02.003
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    4. Jo~ao P. da Cruz & Pedro G. Lind, 2011. "The dynamics of financial stability in complex networks," Papers 1103.0717, arXiv.org, revised Jan 2013.

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    More about this item

    Keywords

    Growth; Boom-bust cycle; Sudden stop; Default; Financial crisis;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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