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Endogenous Borrowing Constraints and Stagnation in Latin America

Latin America has had striking changes in economic performance over time. Following the recession and debt crises of the early 1980’s, per-capita consumption declined for about ten years and in the year 2004 it was not that different from what it was in 1980. This paper studies consumption stagnation in Latin America using a small open economy real business cycle model with endogenous borrowing limits, endogenous capital accumulation and domestic productivity and international interest rate shocks. I find that the model does an excellent job matching the observed behavior of per-capita consumption, and that the interaction of both productivity and international interest rate shocks with the borrowing limit is key. Furthermore I show that unlike conventional wisdom, the participation constraint in this kind of models does not only bind in good times, but it can also bind in prolonged bad times.

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https://doi.org/10.20955/wp.2014.037


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