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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.

Suggested Citation

  • Jacek Rothert & Amanda Michaud, 2011. "Optimal Borrowing Constraints and Growth in a Small Open Economy," Department of Economics Working Papers 130225, The University of Texas at Austin, Department of Economics, revised Feb 2013.
  • Handle: RePEc:tex:wpaper:130225
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    References listed on IDEAS

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    Cited by:

    1. Choi, Woo Jin & Taylor, Alan M., 2017. "Precaution Versus Mercantilism: Reserve Accumulation, Capital Controls, and the Real Exchange Rate," CEPR Discussion Papers 11963, C.E.P.R. Discussion Papers.
    2. Korinek, Anton & Servén, Luis, 2016. "Undervaluation through foreign reserve accumulation: Static losses, dynamic gains," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 104-136.
    3. Rabe, Collin, 2016. "Capital controls, competitive depreciation, and the technological frontier," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 74-102.
    4. Rothert, Jacek, 2016. "On the savings wedge in international capital flows," Economics Letters, Elsevier, vol. 145(C), pages 126-129.
    5. Jeanne, Olivier & Sandri, Damiano, 2016. "Optimal Reserves in Financially Closed Economies," CEPR Discussion Papers 11200, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

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

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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