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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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    Cited by:

    1. Jacek Rothert & Andy Glover & Ayse Kabukcuoglu Dur, 2023. "Winners and losers from reducing global imbalances," GRAPE Working Papers 80, GRAPE Group for Research in Applied Economics.
    2. Jeanne, Olivier & Sandri, Damiano, 2020. "Optimal reserves in financially closed economies," Journal of International Money and Finance, Elsevier, vol. 104(C).
    3. Yin Germaschewski, 2022. "House price, credit supply, and government policy in China," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(2), pages 971-1026, May.
    4. Choi, Woo Jin & Taylor, Alan M., 2022. "Precaution versus mercantilism: Reserve accumulation, capital controls, and the real exchange rate," Journal of International Economics, Elsevier, vol. 139(C).
    5. 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.
    6. Rabe, Collin, 2016. "Capital controls, competitive depreciation, and the technological frontier," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 74-102.
    7. Rothert, Jacek, 2016. "On the savings wedge in international capital flows," Economics Letters, Elsevier, vol. 145(C), pages 126-129.
    8. Bergin, Paul R., 2022. "Currency undervaluation and comparative advantage," European Economic Review, Elsevier, vol. 150(C).
    9. Jacek Rothert & Jacob Short, 2023. "Non-Traded Goods, Factor Markets Frictions, and International Capital Flows," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 158-177, April.

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    More about this item

    Keywords

    learning-by-doing; borrowing constraints; Chinese economy;
    All these keywords.

    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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