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Nonlinear dynamics in a model of financial development with a risk premium

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  • Gomes, Orlando

Abstract

The relation between the degree of financial development of an economy (measured by the extent in which constraints to credit exist) and fluctuations affecting the trend of economic growth, is a relevant theme of discussion in macroeconomics. Some of the literature on this field argues that the cyclical behaviour is generated endogenously, under the model’s assumptions, for specific levels of credit availability. Following this line of reasoning, the paper develops a theoretical framework that places a risk premium over the international interest rate as the centre piece of the explanation for the occurrence of endogenous business cycles, under particular levels of financial development. The risk premium penalizes the borrowing capacity of the less wealth endowed countries. The analysis explores both local and global dynamics.

Suggested Citation

  • Gomes, Orlando, 2007. "Nonlinear dynamics in a model of financial development with a risk premium," MPRA Paper 2887, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:2887
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial development; Credit constraints; Risk premia; Endogenous business cycles; Nonlinear dynamics; Chaos;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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