| Abstract: | Optimal growth path of an ‘impatient’, neoclassical economy is studied, when creditors impose a credit ceiling to prevent debt repudiation. The ceiling becomes binding in finite time. When the credit-constrained regime begins, foreign capital inflows and domestic investment fall abruptly. Output per-capita, consumption, and real wages gradually decline, while the real interest rate rises. These results show that debt crises, in which high external debt is associated to low growth, can occur even in the absence of unanticipated shocks, policy mistakes, or ‘debt overhang’ effects. If distortionary policies cause ‘impatient’ behavior, the model is consistent with chronic capital flight in the debtor country. (JEL F34, F32) |
