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Optimal Borrowing Constraints and Growth in a Small Open Economy

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  • Jacek Rothert

    ()
    (Department of Economics, University of Texas at Austin)

  • Amanda Michaud

    ()
    (Department of Economics, Indiana University)

Abstract

Chinese high growth has been accompanied by government restrictions on international borrowing (capital controls). In this paper, we ask: are such restrictions a useful policy tool to facilitate sustained growth? We provide a theory of borrowing constraints on households as a tool to correct a learning-by-doing externality. We build an open economy model and characterize the optimal constraints. We find welfare gains are closest to that of the Pareto efficient allocation when the externality is not too big or too small. We compute the optimal constraints along the growth path and measure their contribution to the current account and undervalued real exchange rate.

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File URL: https://sites.google.com/site/jacekrothert/research/AMJR_OptimalConstraints.pdf
File Function: Revised version, 2013
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Bibliographic Info

Paper provided by The University of Texas at Austin, Department of Economics in its series Department of Economics Working Papers with number 130225.

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Length: 32 pages (w/o appendix)
Date of creation: Sep 2011
Date of revision: Feb 2013
Handle: RePEc:tex:wpaper:130225

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Keywords: learning-by-doing; borrowing constraints; Chinese economy;

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References

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  1. Marcos Chamon & Eswar Prasad, 2008. "Why are Saving Rates of Urban Households in China Rising?," NBER Working Papers 14546, National Bureau of Economic Research, Inc.
  2. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  3. Maurer-Fazio, Margaret & Connelly, Rachel & Lan, Chen & Tang, Lixin, 2009. "Childcare, Eldercare, and Labor Force Participation of Married Women in Urban China: 1982 - 2000," IZA Discussion Papers 4204, Institute for the Study of Labor (IZA).
  4. Joachim Jarreau & Sandra Poncet, 2009. "Export Sophistication and Economic Performance: Evidence from Chinese Provinces," Working Papers 2009-34, CEPII research center.
  5. Donald R. Haurin & Susan M. Wachter & Patric H. Hendershott, 1995. "Wealth Accumulation and Housing Choices of Young Households: An Exploratory Investigation," NBER Working Papers 5070, National Bureau of Economic Research, Inc.
  6. Christopher D. Carroll & Olivier Jeanne, 2009. "A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds," NBER Working Papers 15228, National Bureau of Economic Research, Inc.
  7. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  8. Harald Badinger & Peter Egger, 2008. "Intra- and Inter-Industry Productivity Spillovers in OECD Manufacturing: A Spatial Econometric Perspective," CESifo Working Paper Series 2181, CESifo Group Munich.
  9. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Investor Protection, Optimal Incentives, and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 1131-1175, August.
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