Endogenous Instability in Credit-Constrained Emerging Economies with Leontief Technology

This work provides a framework to analyze the role of financial development as a source of endogenous instability in emerging economies subject to moral hazard problems. We proposeand study a dynamic model describing a small open economy with a tradeable good produced by internationally mobile capital and a country specific input, using Leontief technology. Wedemonstrate that emerging markets could be endogenously unstable since large capital inflows increase risk and exacerbate asymmetric information problems, according to empirical evidences.Using bifurcation and stability analysis, we describe the properties of the system attractors, we assess the plausibility for complex dynamics and, we find out that border collision bifurcationscan emerge due to the fact that the state space is piecewise smooth. As a consequence, when a fixed or periodic point loses its stability, the final dynamics may become suddenly chaotic. Thisfact may explain how financial crises occurred in emerging economies