Latin America has had striking changes in economic performance over time. Following the recession and debt crises of the early 1980’s, consumption declined for about ten years and consumption per-capita in the year 2004 was roughly the same as it was in 1980. This paper studies consumption stagnation in Latin America using a small open economy real business cycle model with endogenous borrowing limits, capitalistic production and domestic productivity and international interest rate shocks. I find that the model does an excellent job matching the observed behavior of per-capita consumption, and that the interaction of both productivity and international interest rate shocks with the borrowing limit is key.

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