Credit Constraints, Political Instability, and Capital Accumulation

27 Pages Posted: 20 Jan 2014

See all articles by Risto Herrala

Risto Herrala

European Central Bank (ECB) - Directorate General International and European Relations

Rima Turk-Ariss

International Monetary Fund; Economic Research Forum

Date Written: December 2013

Abstract

We investigate the complex interactions between credit constraints, political instability, and capital accumulation using a novel approach based on Kiyotaki and Moore’s (1997) theoretical framework. Drawing on a unique firm-level data set from Middle-East and North Africa (MENA), empirical findings point to a large and significant effect of credit conditions on capital accumulation and suggest that continued political unrest worsens credit constraints. The results support the view that financial development measured by a relaxing of financial constraints is key to macroeconomic development.

Keywords: Credit ceilings, Middle East, North Africa, Transition economies, Capital accumulation, credit constraints, political unrest, MENA countries, equity capital, real interest rate, equity ratio, capital goods, domestic credit, inflation rate, capital market, capital stock, capital markets, capital market imperfections, moral hazard, capital budgeting, domestic equity

JEL Classification: G31, E20, O16, P48

Suggested Citation

Herrala, Risto and Turk-Ariss, Rima, Credit Constraints, Political Instability, and Capital Accumulation (December 2013). IMF Working Paper No. 13/246. Available at SSRN: https://ssrn.com/abstract=2381845

Risto Herrala (Contact Author)

European Central Bank (ECB) - Directorate General International and European Relations ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Rima Turk-Ariss

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Economic Research Forum ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt

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