Optimal Borrowing Constraints and Growth in a Small Open Economy

Jacek Rothert and Amanda Michaud

No 130225, Department of Economics Working Papers from The University of Texas at Austin, Department of Economics

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.

Keywords: learning-by-doing; borrowing constraints; Chinese economy (search for similar items in EconPapers)
JEL-codes: E2 F43 (search for similar items in EconPapers)
Pages: 32 pages (w/o appendix)
Date: 2011-09, Revised 2013-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Optimal borrowing constraints and growth in a small open economy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:tex:wpaper:130225

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