# Minimum investment requirement, financial market imperfection and self-fulfilling belief

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## Abstract

We develop a model in which a strategic complementarity in saving decisions arises due to a minimum investment requirement and financial market imperfection. We explore the role of self-fulling beliefs in determining the long run dynamics. The model exhibits a wide range of dynamic phenomena such as a poverty trap, a big push and a sunspot equilibrium, depending on the level of financial market imperfection. They account for excessive volatility and a sudden change in the saving rate and its macroeconomic consequences without any shocks to fundamentals.

## Keywords

Financial market imperfection Strategic complementarity Saving rate Self-fulfilling belief Sunspot multiple equilibria## JEL Classification

D91 E21 E32 E44 O11 O16## Notes

### Acknowledgments

We thank Costas Azariadis, Yannis Ioannides, Tatsushi Oka, Kwanho Shin, Enrico Spolaore, Yong Wang for their helpful suggestions and comments as well as Wang Zi for excellent research assistance. The financial support of Singapore Ministry of Education, Academic Research Fund Tier 1 R-122-000-112-112, City University of New York, PSC-CUNY Research Award 60030-40 41, and College of Staten Island Provost’s Research Scholarship Award is gratefully acknowledged.

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