Increasing Wealth and Increasing Instability: The Role of Collateral

31 Pages Posted: 7 May 2001

See all articles by Chung-Yi Tse

Chung-Yi Tse

The University of Hong Kong - School of Economics and Finance

Charles Ka Yui Leung

The Chinese University of Hong Kong (CUHK) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 19, 2001

Abstract

In development economics, growth in credit is generally associated with faster long run growth as financial intermediation improves the efficiency of channelling capital to productive investment. Yet, among developing countries high growth in credit almost always guarantees the outbreak of a financial crisis. We attempt to reconcile the two seemingly contradictory facts with an endogenous growth model in which entry to international borrowing entails some significant fixed cost. The poorest countries are excluded from international borrowing because of the fixed cost. The higher income developing countries will find it optimal to sink the fixed cost to borrow internationally, growing faster as a result but also become prone to fluctuations arising from shocks to the international financial market.

Keywords: endogenous growth, borrowing constraint, finance and development, Asian crisis

JEL Classification: E32, O16, O41, O53

Suggested Citation

Tse, Chung and Leung, Ka Yui Charles, Increasing Wealth and Increasing Instability: The Role of Collateral (April 19, 2001). Available at SSRN: https://ssrn.com/abstract=267489 or http://dx.doi.org/10.2139/ssrn.267489

Chung Tse

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
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Hong Kong
+852 2859 1035 (Phone)
+852 2548 1152 (Fax)

Ka Yui Charles Leung (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong
+852-2609-7158 (Phone)
+852-2603-5805 (Fax)

HOME PAGE: http://www.cuhk.edu.hk/eco/staff/kyleung

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