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Working Paper
Debt constrained asset markets
We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized. He cannot be excluded from spot markets trading, however, and he has some private endowments that cannot be seized. All information is publicly held and common knowledge, and there is a complete set of contingent claims markets. Since there is complete information, an agent cannot enter ...
Report
A decade lost and found: Mexico and Chile in the 1980s
Chile and Mexico experienced severe economic crises in the early 1980s. This paper analyzes four possible explanations for why Chile recovered much faster than did Mexico. Comparing data from the two countries allows us to rule out a monetarist explanation, an explanation based on falls in real wages and real exchange rates, and a debt overhang explanation. Using growth accounting, a calibrated growth model, and economic theory, we conclude that the crucial difference between the two countries was the earlier policy reforms in Chile that generated faster productivity growth. The most crucial ...
Discussion Paper
What will happen when foreigners stop lending to the United States?
Since the early 1990s, the United States has borrowed heavily from its trading partners. This paper presents an analysis of the impact of an end to this borrowing, an end that could occur suddenly or gradually.
Report
Firm Entry and Exit and Aggregate Growth
Using data from Chile and Korea, we find that a larger fraction of aggregate productivity growth is due to firm entry and exit during fast-growth episodes compared to slow-growth episodes. Studies of other countries confirm this empirical relationship. We develop a model of endogenous firm entry and exit based on Hopenhayn (1992). Firms enter with efficiencies drawn from a distribution whose mean grows over time. After entering, a firm?s efficiency grows with age. In the calibrated model, reducing entry costs or barriers to technology adoption generates the pattern we document in the data. ...
Report
Trade, growth, and convergence in a dynamic Heckscher-Ohlin model
In models in which convergence in income levels across closed countries is driven by faster accumulation of a productive factor in the poorer countries, opening these countries to trade can stop convergence and even cause divergence. We make this point using a dynamic Heckscher-Ohlin model ? a combination of a static two-good, two-factor Heckscher-Ohlin trade model and a two-sector growth model ? with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, countries that differ only in their initial endowments of capital per ...
Discussion Paper
The Stages of Economic Growth Revisited: Part 1: A General Framework and Taking Off into Growth
We propose a theory for classifying countries according to their stages of growth and for analyzing the determinants of growth in and between the different stages. {{p}} We conclude that, even if they have inefficient institutions and policies, poorer countries can achieve rapid growth by adopting the technologies and managerial practices of countries like the United States. As they become richer, however, their growth rates will decline unless these countries have efficient institutions and policies. For many countries, this requires that they undertake serious institutional and policy ...
Working Paper
An evaluation of the performance of an applied general equilibrium model of the Spanish economy
In 1985?86 the authors were members of a team that constructed a static applied general equilibrium model that was used to analyze the impact on the Spanish economy of the 1986 fiscal reform, which accompanied Spain?s entry into the European Community. This paper compares the results obtained to recently published data for 1985?87; we find that the model performed well in predicting the changes in relative prices and resource allocation that actually occurred, particularly if we incorporate exogenous shocks that affected the Spanish economy in 1986. We also analyze the sensitivity of the ...
Report
Bankruptcy and collateral in debt constrained markets
Typical models of bankruptcy and collateral rely on incomplete asset markets. In fact, bankruptcy and collateral add contingencies to asset markets. In some models, these contingencies can be used by consumers to achieve the same equilibrium allocations as in models with complete markets. In particular, the equilibrium allocation in the debt constrained model of Kehoe and Levine (2001) can be implemented in a model with bankruptcy and collateral. The equilibrium allocation is constrained efficient. Bankruptcy occurs when consumers receive low income shocks. The implementation of the debt ...
Report
In search of scale effects in trade and growth
We look for the scale effects predicted by some theories of trade and growth based on the dynamic returns to scale that arise from learning by doing, investment in human capital, or development of new products. We find little empirical evidence of a relation between the growth rate of GDP per capita and the measures of scale implied by the theory. Restricting attention to the manufacturing sector, however, we find a significant relation between the growth rate of output per worker and the relevant scale variables. We also find that growth rates are significantly related to measures of ...
Report
More on money as a medium of exchange
We extend the analysis of Kiyotaki and Wright, who study an economy in which the different commodities that serve as media of exchange are determined endogenously. Kiyotaki and Wright consider only symmetric, steady-state, pure-strategy equilibria, and find that for some parameter values no such equilibria exist. We consider mixed-strategy equilibria and dynamic equilibria. We prove that a steady-state equilibrium exists for all parameter values and that the number of steady-state equilibria is generically finite. We also show, however, that there may be a continuum of dynamic equilibria. ...