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Optimal Borrowing Constraints and Growth in a Small Open Economy

Listed author(s):
  • 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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File URL: https://sites.google.com/site/jacekrothert/research/AMJR_OptimalConstraints.pdf
File Function: Revised version, 2013
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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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