Increasing Wealth and Increasing Instability: The Role of Collateral

8 Pages Posted: 31 Dec 2002

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

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Abstract

In development economics, growth in credit is generally associated with faster long-run growth as financial intermediation improves the efficiency of channeling capital to productive investment. Yet, among developing countries high growth in credit almost always guarantees the outbreak of a financial crisis. The authors 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.

Suggested Citation

Tse, Chung and Leung, Ka Yui Charles, Increasing Wealth and Increasing Instability: The Role of Collateral. Review of International Economics, Vol. 10, pp. 45-52, 2002. Available at SSRN: https://ssrn.com/abstract=309451

Chung Tse (Contact Author)

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

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Ka Yui Charles Leung

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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