In this paper I develop a simple model of dynamic general equilibrium similar to the neoclassical... more In this paper I develop a simple model of dynamic general equilibrium similar to the neoclassical growth model, but where credit flows are created by agents stochastically receiving investment opportunities that allow them to create new capital. Hence they may switch status over time from investors to workers and vice versa. Agents can issue equity up to a given fraction, so they can partially finance their investment costs externally and are in effect borrowing constrained. I characterize steady states and transitional dynamics in this environment and analyze the effects on allocations, asset prices and returns of a sudden, unexpected credit crunch: an exogenous, unanticipated decrease in the maximum fraction of investment costs that can be financed externally. I find that this type of unexpected shock generates a contraction in output and produces an heterogeneous response in the return on assets, depending on the agent's status.
The Argentinean current account has exhibited large fluctuations over time. Sizable deficits over... more The Argentinean current account has exhibited large fluctuations over time. Sizable deficits over the last part of the 19th century and beginning of the 20th were followed by an almost equilibrated balance for most of the 20th century. Moderate deficits were again recorded between 1990 and 2002. Can factors highlighted by the intertemporal approach to the current account explain the dynamics of the Argentinean external sector for the 1885-2002 period? To answer this question we make use of a model featuring two main external shocks for small economies: real interest rates and exchange rates. In contrast to its application to other Latin American countries, the intertemporal model does not track well the actual current account from 1885 to 2002 in Argentina. This is due to the country's lack of access to the international financial system (a main assumption in the model), the occurrence of balance of payments crises, and the stop and go process. There is, however, some evidence in favor of the theory for the period 1885-1930, when capital mobility was relatively high and free of currency crises and stop and go cycles.
I develop a stylized model of endogenous growth in which the level of financial depth influences ... more I develop a stylized model of endogenous growth in which the level of financial depth influences an economy's long-run growth. Financial depth is defined within the model as the ease with which investors can issue equity in the market on new units of capital. I assume that agents differ in the cost of undertaking investment projects and that there is a fixed distribution of such costs across the population. I theoretically identify channels through which financial depth influences growth, both positively and negatively. When considering a specific distribution of costs, I show that the net effect of financial depth on growth is non-monotonic. It depends on the shape of the distribution, as well as the level or stage of financial depth. The results of this paper help to rationalize some findings in the recent empirical literature on the non-monotonic effect of financial depth on long-run growth. The model is even capable of obtaining a negative effect of excessive financial depth on growth, a result that is also found in the empirical literature.
In this paper I develop a simple model of dynamic general equilibrium similar to the neoclassical... more In this paper I develop a simple model of dynamic general equilibrium similar to the neoclassical growth model, but where credit flows are created by agents stochastically receiving investment opportunities that allow them to create new capital. Hence they may switch status over time from investors to workers and vice versa. Agents can issue equity up to a given fraction, so they can partially finance their investment costs externally and are in effect borrowing constrained. I characterize steady states and transitional dynamics in this environment and analyze the effects on allocations, asset prices and returns of a sudden, unexpected credit crunch: an exogenous, unanticipated decrease in the maximum fraction of investment costs that can be financed externally. I find that this type of unexpected shock generates a contraction in output and produces an heterogeneous response in the return on assets, depending on the agent's status.
The Argentinean current account has exhibited large fluctuations over time. Sizable deficits over... more The Argentinean current account has exhibited large fluctuations over time. Sizable deficits over the last part of the 19th century and beginning of the 20th were followed by an almost equilibrated balance for most of the 20th century. Moderate deficits were again recorded between 1990 and 2002. Can factors highlighted by the intertemporal approach to the current account explain the dynamics of the Argentinean external sector for the 1885-2002 period? To answer this question we make use of a model featuring two main external shocks for small economies: real interest rates and exchange rates. In contrast to its application to other Latin American countries, the intertemporal model does not track well the actual current account from 1885 to 2002 in Argentina. This is due to the country's lack of access to the international financial system (a main assumption in the model), the occurrence of balance of payments crises, and the stop and go process. There is, however, some evidence in favor of the theory for the period 1885-1930, when capital mobility was relatively high and free of currency crises and stop and go cycles.
I develop a stylized model of endogenous growth in which the level of financial depth influences ... more I develop a stylized model of endogenous growth in which the level of financial depth influences an economy's long-run growth. Financial depth is defined within the model as the ease with which investors can issue equity in the market on new units of capital. I assume that agents differ in the cost of undertaking investment projects and that there is a fixed distribution of such costs across the population. I theoretically identify channels through which financial depth influences growth, both positively and negatively. When considering a specific distribution of costs, I show that the net effect of financial depth on growth is non-monotonic. It depends on the shape of the distribution, as well as the level or stage of financial depth. The results of this paper help to rationalize some findings in the recent empirical literature on the non-monotonic effect of financial depth on long-run growth. The model is even capable of obtaining a negative effect of excessive financial depth on growth, a result that is also found in the empirical literature.
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Papers by Sergio Salas