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Sectoral structure and financial fragility in emerging economies

Yannick Kalantzis 
Abstract : The nineteen-nineties have witnessed a number of dramatic balance-of payments crises in developing economies that had recently opened their capital account. These crises consisted in a large real depreciation, a sudden decrease in investment, and a current account reversal; they had particularly strong effects in the non-tradable sector. This work studies the impact of the sectoral structure, taking into account the sectors producing tradable and non-tradable goods, on the possibility of balance-of-payments crises in an emerging economy. We build four different theoretical models of a two-sector small open economy. A balance of- payments crisis is modeled as a self-fulfilling real depreciation which relies on balance sheet effects. The models also study the determinants of the sectoral structure and its evolution after a capital account liberalization. Our results show that crisis equilibria exist when the relative size of the non-tradable sector is large enough. They also show that a strong capital account liberalization leads to an increase in the relative size of this sector and can therefore make the economy financially fragile in the long run. Conditions for this financial fragility in the long run are derived. They involve international factors like the world interest rate, but also depend on domestic structural factors specific to each country, like the intensity of borrowing constraints, the rate of technical progress, the sectoral technological levels, or the degree of financial openness.
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Submitted on : Tuesday, November 7, 2006 - 8:00:00 AM
Last modification on : Tuesday, November 7, 2006 - 8:00:00 AM
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  • HAL Id : pastel-00001997, version 1



Yannick Kalantzis. Sectoral structure and financial fragility in emerging economies. Humanities and Social Sciences. Ecole des Ponts ParisTech, 2006. English. ⟨pastel-00001997⟩



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