Optimal Development Policies with Financial Frictions

Oleg Itskhoki and Benjamin Moll

No 19994, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study optimal dynamic Ramsey policies in a standard growth model with financial frictions. For developing countries with low financial wealth, the optimal policy intervention increases labor supply and lowers wages, resulting in higher entrepreneurial profits and faster wealth accumulation. This in turn relaxes borrowing constraints in the future, leading to higher labor productivity and wages. The use of additional policy instruments, such as subsidized credit, may be optimal as well. In the long run, the optimal policy reverses sign. Taking advantage of the tractability of our framework, we extend the model to study its implications for optimal exchange rate and sectoral industrial policies.

JEL-codes: E60 F40 O1 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-dge and nep-mac
Note: DEV EFG IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as Oleg Itskhoki & Benjamin Moll, 2019. "Optimal Development Policies With Financial Frictions," Econometrica, Econometric Society, vol. 87(1), pages 139-173, January.

Downloads: (external link)
http://www.nber.org/papers/w19994.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:19994

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w19994

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().