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Optimal Borrowing Constraints and Growth in a Small Open Economy

  • Jacek Rothert


    (Department of Economics, University of Texas at Austin)

  • Amanda Michaud


    (Department of Economics, Indiana University)

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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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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  1. 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).
  2. Marcos D. Chamon & Eswar S. Prasad, 2010. "Why Are Saving Rates of Urban Households in China Rising?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 93-130, January.
  3. 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.
  4. 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.
  5. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  6. 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.
  7. repec:tpr:qjecon:v:119:y:2004:i:3:p:1131-1175 is not listed on IDEAS
  8. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  9. Joachim Jarreau & Sandra Poncet, 2009. "Export Sophistication and Economic Performance: Evidence from Chinese Provinces," Working Papers 2009-34, CEPII research center.
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