Credit rationing and capital accumulation with investment and consumption loans revisited |
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| Institution: | 1. University of Minnesota, USA;2. Chinese University of Hong Kong, Hong Kong;3. City University of Hong Kong, Hong Kong;1. Institute of Water Resources and Hydropower Research, Northwest A&F University, Shaanxi Yangling 712100, P R China;2. Department of Mathematics and Statistics, Faculty of Science and Engineering Curtin University, Perth Western Australia 6845, Australia;1. Ifo Institute — Leibniz-Institute for Economic Research at the University of Munich, Poschingerstr. 5, D-81679 Munich. Germany;2. University of Erlangen-Nuremberg, Department of Economics, Lange Gasse 20, 90403 Nuremberg, Germany;1. UIC Barcelona, Inmaculada 22, 08017 Barcelona, Spain and IZA Bonn, Germany;2. Universitat Autònoma de Barcelona, Departament d''Economia Aplicada, Edifici B, Bellaterra, 08193 Barcelona, Spain |
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| Abstract: | A simple model is developed to evaluate the roles of credit rationing and government policies of financial repression in the process of capital accumulation. In the model, credit rationing on both investment and consumption loans decreases as capital accumulates but increases as the government imposes policies of financial repression to a greater extent. While a reduction in credit rationing on consumption loans impedes capital accumulation, such a reduction on investment loans facilitates it. We find that developing countries may be trapped at a low-capital-stock steady state while developed countries converge to a high-capital-stock steady state. Instead of adopting policies of financial liberalization, interestingly, this paper finds that policies of financial repression may enable developing countries to escape the development trap. |
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