Growth and Capital Flows with Risky Entrepreneurship

February 1, 2010

Preview Citation

Format: Chicago

Damiano Sandri. Growth and Capital Flows with Risky Entrepreneurship, (USA: International Monetary Fund, 2010) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper shows that the behavior of entrepreneurs facing incomplete financial markets and risky investment can explain why growth accelerations in developing countries tend to be associated with current account improvements. The uninsurable risk of losing invested capital forces entrepreneurs to rely on self-financing, so that when business opportunities open up entrepreneurs increase saving to finance the investment that produces growth. The key insight is that saving has to rise more than investment to allow also for the accumulation of precautionary assets. Plausibly calibrated simulations show that this net saving increase can sustain large and persistent net capital outflows.

Subject: Balance of payments, Capital outflows, Financial markets, Financial sector development, Income, Labor, National accounts, Self-employment, Wages

Keywords: Capital Flows, Capital outflows, Depreciation rate, Eastern Europe, Economy dynamics, Failure risk, Financial Development, Financial market imperfection, Financial sector development, Growth, Idiosyncratic risk, Income, Interest rate, Investment Risk, Market-clearing wage, Open economy, Production function, Risk sharing, Saving, Saving rate, Self-employment, Wages, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/037
Stock No:

WPIEA2010037
ISBN:

9781451962802
ISSN:

1018-5941

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