Fernando Perera-Tallo

Credit and Inflation under Borrower's Lack of Commitment ∗

Here we investigate the existence of credit in a cash-in-advance economy where there are complete markets but for the fact that agents cannot commit to repay their debts. Defectors are banned from the credit market but they can use money balances for saving purposes. Without uncertainty, deflation crowds out credit completely. The equilibrium allocation, however, is efficient if the government deflates at the time preference rate. Efficiency can also be restored with positive inflation. For any non negative inflation rate below the optimal level, the volume of credit and the real interest rate increase with inflation. Our results hold when idiosyncratic uncertainty is introduced and households are sufficiently impatient but in one instance: efficiency cannot be restored if the deflation rate is nearby the rate of time preference. Our numerical examples suggest that the optimal inflation rate is not too large for reasonable levels of patience and risk aversion. Finally, we present a framework where the use of money arises endogenously and show that it is tantamount to our cash-in-advance framework. Our results hold in this modified environment.

The Transmission of Sustained Growth Through the Terms of Trade in an Endogenous Growth Model

This paper develops a two-country model of endogenous growth and international trade in intermediate goods. In autarky just one of the economies enjoys sustained growth. The trade situation may be characterized by complete specialization of both countries, or by incomplete specialization of the growing economy. In either case, trade transmits perpetual growth to the stagnant economy because of the permanent improvements in its terms of trade. The existence of a non-reproducible factor in the growing economy is crucial to ensure propagation of growth. Moreover, under incomplete specialization countries converge in per capita income. This result relies on two assumptions. First, there must be a large enough share of world income to pay for the input in which the stagnant economy has comparative advantage. Second, all technologies producing intermediate goods should be equally intensive in the non-reproducible factor.This paper develops a two-country model of endogenous growth and international trade in intermediate goods. In autarky just one of the economies enjoys sustained growth. The trade situation may be characterized by complete specialization of both countries, or by incomplete specialization of the growing economy. In either case, trade transmits perpetual growth to the stagnant economy because of the permanent improvements in its terms of trade. The existence of a non-reproducible factor in the growing economy is crucial to ensure propagation of growth. Moreover, under incomplete specialization countries converge in per capita income. This result relies on two assumptions. First, there must be a large enough share of world income to pay for the input in which the stagnant economy has comparative advantage. Second, all technologies producing intermediate goods should be equally intensive in the non-reproducible factor.

Declining Predation During Development: A Feedback Process

Empirical evidence suggests that poorer countries have larger amounts of predation. We formulate a neoclassical growth model in which agents devote time to either produce or predate. When the elasticity of substitution between labour and capital is lower than one, the labour share rises with capital, reducing the incentive to predate and increasing the incentive to produce throughout the transition. Consequently, a feedback process between capital accumulation and predation arises, which amplifies income differences generated by differences in productivity. This paper helps to explain why differences between countries have remained stable and the key role that institutions play in development.