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.
"Growth and Capital Flows with Risky Entrepreneurship." American Economic Journal: Macroeconomics,
Macroeconomics: Consumption; Saving; Wealth
Capital; Investment; Capacity
Current Account Adjustment; Short-term Capital Movements
Open Economy Macroeconomics
Economic Growth of Open Economies
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill