International credit and welfare: A paradoxical theorem and its policy implications |
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Authors: | Kaushik Basu Hodaka Morita |
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Institution: | a Department of Economics, Cornell University, Ithaca, NY 14853, USA b School of Economics, The University of New South Wales, Sydney, NSW 2052, Australia |
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Abstract: | This paper considers a developing nation that faces a foreign exchange shortage and hence its demand for foreign goods is limited both by its income and its foreign exchange balance. Availability of international credit relaxes the second constraint. We develop a simple model of strategic interaction between lending institutions and firms, and show that the availability of international credit at concessionary rates can leave the borrowing nation worse off than if it had to borrow money at higher market rates. This ‘paradox of benevolence’ is then used to motivate a discussion of policies pertaining to international lending and the Southern government's method of rationing out foreign exchange to the importers. |
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Keywords: | L10 F30 O10 |
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