Endogenous Borrowing Constraints and Stagnation in Latin America

Latin America has had striking changes in economic performance over time. None more striking than consumption. Consumption per-capita in the year 2004 was roughly the same as it was in 1980. Latin America is also an open economic region, with several international debt crises. This paper studies the time path of consumption using a small open economy real business cycle model with limited commitment. I compare the distortions to the planner's pareto weights and investment that are generated endogenously by the model, to those that can be recovered from an international extension of a business cycle accounting exercise in the spirit of Chari, Kehoe and McGrattan (2007). I find that the limited commitment model does a good job at explaining the behavior of Latin American consumption and that the endogenous distortions to the planner's pareto weights are very similar to those recovered from the accounting exercise.