Chaotic Dynamics in Credit Constrained Emerging Economies

• Authors: Jordi Caballé.
• BSE Working Paper: 110594 | September 15
• Keywords: Chaotic Dynamics , credit constraints , financial development
• JEL codes: O16, C62
• Chaotic Dynamics
• credit constraints
• financial development

This paper analyzes the role of financial development as a source of endogenous instability in small open economies. By assuming that firms face credit constraints, our model displays a complex dynamic behavior for intermediate values of the parameter representing the level of financial development of the economy. The basic implication of our model is that economies experiencing a process of financial development are more unstable than both very underdeveloped and very developed economies. Our instability concept means that small shocks have a persistent effect on the long run behavior of the model and also that economies can exhibit cycles with a very high period or even chaotic dynamic patterns.