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The Financial Resource Curse

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  • Benigno, Gianluca
  • Fornaro, Luca

Abstract

This paper presents a model of financial resource curse, i.e. episodes of abundant access to foreign capital coupled with weak productivity growth. We study a two-sector, tradable and non-tradable, small open economy. The tradable sector is the engine of growth, and productivity growth is increasing in the amount of labor employed by firms in the tradable sector. A period of large capital inflows, triggered by a fall in the interest rate, is associated with a consumption boom. While the increase in tradable consumption is financed through foreign borrowing, the increase in non-tradable consumption requires a shift of productive resources toward the non-tradable sector at the expenses of the tradable sector. The result is stagnant productivity growth. We show that capital controls can be welfare-enhancing and can be used as a second best policy tool to mitigate the misallocation of resources during an episode of financial resource curse.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9489.

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Date of creation: May 2013
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Handle: RePEc:cpr:ceprdp:9489

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Keywords: capital controls; capital flows; endogenous growth; the financial resource curse;

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References

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Citations

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Cited by:
  1. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2013. "Capital Controls or Real Exchange Rate Policy?: A Pecuniary Externality Perspective," IDB Publications 80682, Inter-American Development Bank.
  2. Reis, Ricardo, 2013. "The Portuguese Slump and Crash and the Euro Crisis," CEPR Discussion Papers 9591, C.E.P.R. Discussion Papers.
  3. Bussière, Matthieu & Lopez, Claude & Tille, Cédric, 2014. "Do Real Exchange Rate Appreciations Matter for Growth?," CEPR Discussion Papers 9938, C.E.P.R. Discussion Papers.
  4. Philip R. Lane, 2013. "Growth and Adjustment Challenge for the Euro Area," The Institute for International Integration Studies Discussion Paper Series iiisdp426, IIIS.
  5. Martin Berka & Michael B. Devereux, 2013. "Trends in European real exchange rates," Economic Policy, CEPR & CES & MSH, vol. 28(74), pages 193-242, 04.

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