Chaos in credit–constrained emerging economies with Leontief technology

<span style="font-size: 9.5pt"><span style="font-size: 9.5pt">This work provides a framework to analyze the role of financial development as</span><span style="font-size: 9.5pt">a source of endogenous instability in emerging economies subject to moral hazard</span><span style="font-size: 9.5pt">problems. We study a piecewise linear dynamic model describing a small open economy</span><span style="font-size: 9.5pt">with a tradable good produced by internationally mobile capital and a country</span><span style="font-size: 9.5pt">specific production factor, using Leontief technology. We demonstrate that emerging</span><span style="font-size: 9.5pt">markets could be endogenously unstable when large capital in–flows increase risk</span><span style="font-size: 9.5pt">and exacerbate asymmetric information problems, according to empirical evidence.</span><span style="font-size: 9.5pt">Using bifurcation and stability analysis we describe the properties of the system</span><span style="font-size: 9.5pt">attractors, we assess the plausibility for complex dynamics and we find out that</span><span style="font-size: 9.5pt">border collision bifurcations can emerge.</span></span>