Financial Frictions and the Persistence of History: A Quantitative Exploration

Francisco J. Buera
Yongseok Shin
Publication Type: 
Working Papers
Publication Year: 
2008

This paper presents a quantitative model of economic transitions. We explicitly model resource misallocation and financial frictions to explain observed transitional dynamics that are not consistent with the standard neoclassical growth theory. When calibrated to empirical evidence on resource misallocation and financial frictions in less developed countries, our model economy converges slowly to the steady state—it typically takes four times as long to cover half the distance to the steady state as the neoclassical benchmark. The interest rate and investment to- output ratio start low and rise over time in the early phases of economic development. In addition, the model generates an endogenous TFP dynamics, reflecting the gradual unwinding of misallocation along transitions.

JEL Codes: 
E3, E32, G3, G34
Region: 
Global
Country: 
Global
Topic: 
Enterprise
Topic: 
Economic Modeling
Topic: 
Occupational Choice
Topic: 
General Equilibrium
Topic: 
Growth