Optimal borrowing constraints and growth in a small open economy |
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| Institution: | 1. Indiana University, United States;2. U.S. Naval Academy, United States;1. Department of Economics, University of Oregon, Eugene, OR 97403-1285, United States;2. NBER, United States;3. Maison des Sciences Economiques, 106-112 Bd de l''Hôpital, 75647 Paris Cedex 13, France;4. CESifo, Germany;5. Ecole Normale Superieure de Cachan 61, avenue du Pr?sident Wilson, Bat Cournot, Office 503, 94235 Cachan Cedex, France;1. University of Munich, Germany;2. Paris School of Economics — ENPC, France;1. Department of Economics, University of Oregon, Eugene, OR 97403-1285, United States;2. NBER, United States;1. Michigan State University, United States;2. The Research Institute of Industrial Economics, Sweden;3. Lund University, Sweden |
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| 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. |
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