International Credit and Welfare: A Paradoxical Theorem and Its Policy Implications
AbstractThis paper considers a developing nation that faces a foreign exchange shortage and hence its demand for foreign goods is limited both by its income and its foreign exchange balance. Availability of international credit relaxes the second constraint. We develop a simple model of strategic interaction between lending institutions and firms, and show that the availability of international credit at concessionary rates can leave the borrowing nation worse off than if it had to borrow money at higher market rates. This 'paradox of benevolence' is then used to motivate a discussion of policies pertaining to international lending and the Southern government's method of rationing out foreign exchange to the importers.
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Bibliographic InfoPaper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 05-04.
Date of creation: May 2005
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Other versions of this item:
- Basu, Kaushik & Morita, Hodaka, 2006. "International credit and welfare: A paradoxical theorem and its policy implications," European Economic Review, Elsevier, vol. 50(6), pages 1507-1528, August.
- F30 - International Economics - - International Finance - - - General
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
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