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Multiple Equilibrium, Variability, and the Development Process

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  • Luis Carranza
  • Mr. José Enrique Galdón-Sánchez

Abstract

Per capita output is more volatile in middle-income economies than in both low-income and high-income economies. We examine this pattern in a two-period overlapping generations model with two productive sectors (a developed sector and a subsistence sector) and a credit sector. In the early and mature stages of development, there is a unique equilibrium, because labor and credit markets are cleared by a unique set of prices. In the middle stages of development, however, the model shows that markets can be cleared by a multiple set of prices. This multiplicity of equilibria arises as productive externalities are reflected in credit markets.

Suggested Citation

  • Luis Carranza & Mr. José Enrique Galdón-Sánchez, 1998. "Multiple Equilibrium, Variability, and the Development Process," IMF Working Papers 1998/062, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1998/062
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    Cited by:

    1. Carranza, Luis & Galdon-Sanchez, Jose E., 2004. "Financial intermediation, variability and the development process," Journal of Development Economics, Elsevier, vol. 73(1), pages 27-54, February.

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