Minimum investment requirement,financial market imperfection and self-fulfilling belief |
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| Authors: | Tomoo Kikuchi George Vachadze |
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| Institution: | 1.Centre on Asia and Globalisation, Lee Kuan Yew School of Public Policy,National University of Singapore,Singapore,Singapore;2.School of Business, College of Staten Island Graduate Center,City University of New York,New York,USA |
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| Abstract: | We develop a model in which a strategic complementarity in saving decisions arises due to a minimum investment requirement and financial market imperfection. We explore the role of self-fulling beliefs in determining the long run dynamics. The model exhibits a wide range of dynamic phenomena such as a poverty trap, a big push and a sunspot equilibrium, depending on the level of financial market imperfection. They account for excessive volatility and a sudden change in the saving rate and its macroeconomic consequences without any shocks to fundamentals. |
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