Less developed countries (LDCs) have experienced considerable business cycles in recent decades. This coincides with significant increases in their external debt to GDP ratios. Recent theoretical credit cycles literature suggests that indebtedness, and the resulting liquidity constraints, could explain LDC business cycles. This paper builds a macroeconomic model to trace the LDC income paths. In this model indebtedness and liquidity constraints reduce aggregate investment. We use the World Data (1995) to calibrate for the convergence parameter. It is found that LDC cycles are convergent and non-oscillatory, and indebtedness delays the return to long-term steady state income.
Less Developed Country Business Cycles. (2002). Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/692
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