Chaotic Dynamics in Credit Constrained Emerging Economies


This paper analyzes the role of financial development as a source of endogenous instability in small open economies. By assuming that firms face credit constraints, our model displays a complex dynamic behavior for intermediate values of the parameter representing the level of financial development of the economy. The basic implication of our model is that economies experiencing a process of financial development are more unstable than both very underdeveloped and very developed economies. Our instability concept means that small shocks have a persistent effect on the long run behavior of the model and also that economies can exhibit cycles with a very high period or even chaotic dynamic patterns.
Published as: Chaotic Dynamics in Credit Constrained Emerging Economies in Journal of Economic Dynamics and Control , Vol. 30, No. 8, 1261--1275, January, 2006