Optimal borrowing constraints and growth in a small open economy

Amanda Michaud and Jacek Rothert

Journal of International Economics, 2014, vol. 94, issue 2, 326-340

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 growth? We provide a theory of borrowing constraints on households as a tool to correct a learning-by-doing externality. Borrowing constraints operate as a policy tool through two channels: (i) increasing labor supply and (ii) reallocating labor towards traded goods. We find that welfare gains are closest to that of the First-Best Planner allocation when the externality is not too large. We compute the sequence of optimal constraints along the growth path and show how the use of this policy tool contributes to repressed wages, current account balance, and slow real exchange rate appreciation.

Keywords: Learning-by-doing; Borrowing constraints; Chinese economy; Capital controls (search for similar items in EconPapers)
JEL-codes: F43 O41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:94:y:2014:i:2:p:326-340

DOI: 10.1016/j.jinteco.2014.07.001

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