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Increasing Wealth and Increasing Instability: The Role of Collateral
Author(s) -
Tse Chung Yi,
Leung Charles Ka Yui
Publication year - 2002
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00316
Subject(s) - economics , collateral , financial intermediary , developing country , monetary economics , investment (military) , endogenous growth theory , fixed cost , financial market , macroeconomics , finance , microeconomics , market economy , human capital , politics , political science , law , economic growth
In development economics, growth in credit is generally associated with faster long‐run growth as financial intermediation improves the efficiency of channeling capital to productive investment. Yet, among developing countries high growth in credit almost always guarantees the outbreak of a financial crisis. The authors attempt to reconcile the two seemingly contradictory facts with an endogenous growth model in which entry to international borrowing entails some significant fixed cost. The poorest countries are excluded from international borrowing because of the fixed cost. The higher‐income developing countries will find it optimal to sink the fixed cost to borrow internationally, growing faster as a result, but also become prone to fluctuations arising from shocks to the international financial market.