Trade balance constraints and optimal regulation

Omar Chisari and Lucía Quesada

No 18_2005, UADE Working Papers from Instituto de Economía, Universidad Argentina de la Empresa

Abstract: In this paper we develop a model to understand the interactions between optimal regulation and external credit constraints. If a big proportion of the regulated sector is owned by foreign investors, a credit-constrained country who wants to send profits abroad has to generate enough surplus in the trade account in order to compensate capital outflows. This may be a real problem in developing countries, in which regulated sectors are big and foreign ownership is very important. We show that the credit constraint translates into a constraint of maximum profits for the regulated firm. As a consequence, overall efficiency in the regulated sector is reduced to maintain incentive compatibility. With a flexible exchange rate, devaluation is an additional instrument to relax the credit constraint, but the country is not in general willing to relax it completely. Efficiency is higher than with a fixed exchange rate, but it’s still lower than without credit constraints.

Keywords: Optimal regulation; Credit constraint; Trade (search for similar items in EconPapers)
JEL-codes: D82 F32 L51 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2005-03-01
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