No abstract

This paper considers a puzzle in growth theory from a Keynesian perspective. If neither wage and price adjustment nor monetary policy are effective at stimulating demand, no endogenous dynamic process exists to assure that demand grows fast enough to employ a growing labor force. Yet output grows persistently over long periods, occasionally reaching approximate full employment. We resolve this puzzle by invoking Harrod's instability results. Demand grows because it follows an explosive upward path that is ultimately limited by resource constraints. Downward demand instability is contained by introducing an autonomous component to aggregate demand.

The paper discusses the main features that distinguish inter‐firm international trade finance from alternative sources of financing and evaluates the potential effects of a financial crisis on the use of this form of financing for firms operating in developing countries. It argues that, on the one hand, inter‐firm trade finance could help overcome informational problems associated with other lending relationships, but, on the other, it may contribute to propagate shocks because of the interconnection among firms along credit chains. While these advantages could remain largely unexploited because of poor legal institutions, the disadvantages could be exacerbated because of these firms’ greater exposure to a default chain. Based on these arguments, a menu of choices is identified for policymakers to boost firms’ access to inter‐firm trade finance in times of crisis.