American Economic Journal: Macroeconomics: Vol. 6 No. 3 (July 2014)

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Growth and Capital Flows with Risky Entrepreneurship

Article Citation

Sandri, Damiano. 2014. "Growth and Capital Flows with Risky Entrepreneurship." American Economic Journal: Macroeconomics, 6(3): 102-23.

DOI: 10.1257/mac.6.3.102

Abstract

We show that the behavior of entrepreneurs facing incomplete financial markets and risky investment can explain why accelerations of productivity growth in developing countries tend to be associated with current account improvements. Under uninsurable investment risk, entrepreneurs have to largely rely on self-financing so that, when productivity growth rises, entrepreneurs increase saving to finance new investment. The key insight is that saving has to increase more than investment to also allow for the accumulation of precautionary assets that entrepreneurs hold for self-insurance against investment risk. Numerical simulations show that this net saving increase can generate a current account improvement in line with the empirical evidence.

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Authors

Sandri, Damiano (IMF)

JEL Classifications

E21: Macroeconomics: Consumption; Saving; Wealth
E22: Capital; Investment; Capacity
F32: Current Account Adjustment; Short-term Capital Movements
F41: Open Economy Macroeconomics
F43: Economic Growth of Open Economies
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
L26: Entrepreneurship

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