Abstract
Financial frictions have been considered a crucial factor in explaining growth disparities across countries. These frictions are typically viewed as an exogenous constraint on borrowing capacity that is assumed to be invariant to economic conditions, such as the level of GDP and business cycle fluctuations. However, assuming the exogenous constraint on borrowing often leads to unrealistic dynamics in macroeconomic variables, such as constant investment-to-GDP and loan-to-value ratios. Motivated by these limitations, we develop a growth model in which the severity of the borrowing constraint is endogenously determined. The borrowing constraint adversely affects growth and amplifies the negative effect of volatility on growth. However, these growth effects gradually disappear as the economy continues to grow, because debtors become more willing to honor their debts along with economic growth, resulting in an endogenous relaxation of the borrowing constraint.
Acknowledgements
The author is grateful to the editor and anonymous referees for their insightful feedback, which greatly enhanced the paper. The author also benefited from valuable feedback provided by Costas Azariadis, Rodolfo Manuelli, Yongseok Shin, Ping Wang, Raul Santaeulalia-Llopis, Steve Williamson, Chul-In Lee, Kyoung Hyun Koo, and audiences at various seminars.
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Supplementary Material
This article contains supplementary material (https://doi.org/10.1515/bejm-2024-0028).
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Artikel in diesem Heft
- Frontmatter
- Advances
- Corporate Tax Rates, Allocative Efficiency, and Aggregate Productivity
- Contributions
- Endogenous Financial Friction and Growth
- Decomposing Structural Change
- Industry Impacts of US Unconventional Monetary Policy
- Monetary Policy Transmission in Canada – A High Frequency Identification Approach
- Child Labor, Corruption, and Development
- Inflation Uncertainty from Firms’ Perspective, Overconfidence and Credibility of Monetary Policy
- Does Nominal Wage Stickiness Affect Fiscal Multiplier in a Two-Agent New Keynesian Model?
- To Create or to Redistribute? That is the Question
- Estimating Expected Asset Returns with the Present Value Model of Consumption and Fed Forecasts
Artikel in diesem Heft
- Frontmatter
- Advances
- Corporate Tax Rates, Allocative Efficiency, and Aggregate Productivity
- Contributions
- Endogenous Financial Friction and Growth
- Decomposing Structural Change
- Industry Impacts of US Unconventional Monetary Policy
- Monetary Policy Transmission in Canada – A High Frequency Identification Approach
- Child Labor, Corruption, and Development
- Inflation Uncertainty from Firms’ Perspective, Overconfidence and Credibility of Monetary Policy
- Does Nominal Wage Stickiness Affect Fiscal Multiplier in a Two-Agent New Keynesian Model?
- To Create or to Redistribute? That is the Question
- Estimating Expected Asset Returns with the Present Value Model of Consumption and Fed Forecasts