Quantitative Restrictions and Foreign Investment in a Monetary Economy
This paper examines the welfare effect of foreign investment under quantitative restrictions for a host country with a cash-in-advance constraint. This constraint results in a divergence between the consumer virtual prices and the world prices. If the cash required for purchasing exportable goods exceeds that of the importable, additional foreign investment can widen the price divergence and, thus, reduce welfare. This result is contrary to the conventional view that foreign investment is non-immiserizing under quantitative restrictions. On the other hand, if the cash requirement is larger for buying importable goods, foreign investment can still promote welfare.
Volume (Year): 1 (2002)
Issue (Month): 1 (April)
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Departmental Working Papers
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