Financial liberalization: Poverty trap or chaos

We construct an overlapping generations model in which people are subject to limited pledgeability and uncertainty over entrepreneurial projects. We show that whether financial liberalization generates a poverty trap, an endogenous fluctuation, or both depends on the interaction of pledgeability and uncertainty. Endogenous fluctuation requires a high level of both pledgeability and uncertainty. Poverty trap requires a low level of both. For an intermediate level of both, the initially poor are trapped in poverty while the initially rich fluctuate endogenously.