Financial frictions in business cycles, trade and growth

This dissertation is about the role of financial frictions in the business cycles, trade and growth. First, I analyze what is the role of asymmetric information problems between borrowers and lenders in the business cycles, and second, I study the role of imperfect enforcement in financial contracts on a typical country's trade and growth patterns.; In Chapter 1, I show how asymmetric information problems between banks and firms can be responsible for producing endogenous long lasting recession both at the micro and macroeconomic levels after an external shock on the interest rate faced by a small open economy. The only source of shocks is through the international interest rate or through the country risk, and the main transmission mechanism appears because banks do not observe the firms' expected productivity. In this environment, banks can infer the average quality of the firms taking each type of credit contract by observing the firms' age and net worth, thus determining credit conditions. This feature of the model introduces heterogeneity among different generations of firms that live at the same period of time and give us insights regarding the performance of small firms along macroeconomic downturns. The results of the paper are threefold. First, unexpected increments of the interest rate produce endogenous long-lasting recessions because both the average “net worth” of the firms and their “reputation”—in financial markets—are important in generating business cycles. Second, by adding externalities in production the model is able to mimic fairly well macroeconomic and microeconomic dynamics observed along some business cycle episodes. Finally, I show that governments stabilizing policies can be welfare improving.; In Chapter 2, I study the role of financial imperfections and income distribution on trade and growth patterns. A two-sector overlapping generation economy model is analyzed where one of the sectors is characterized by an imperfection in credit markets due to moral hazard. I show that two economies with otherwise equal characteristics but with different income distribution will exhibit dissimilar comparative advantages in trade. I also analyze the dynamics of wealth distribution to show that the economy is likely to pass through different phases of trade patterns in its development process. At initial stages of development, the model economy exhibits a comparative advantage over the sector characterized by no—or less—financial frictions, to eventually revert the trade pattern at more advanced stages.