Credit Rationing in an Open Economy

This paper claims that credit market imperfections matter significantly to open economies and can alter basic macroeconomic results. This is demonstrated in the paper by use of an open-economy model with individual credit rationing, due to asymmetric information and moral hazard. The paper concentrates on the effect of fiscal policy and shows that when credit is rationed the standard result does not hold and a fiscal expansion may create a surplus instead of a deficit in the current account. Furthermore, the paper shows that whether credit is rationed or not depends on the tax burden. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.