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The financial resource curse

Benigno, Gianluca and Fornaro, Luca (2013) The financial resource curse. CEP Discussion Papers, CEPDP1217. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Identification Number: CEPDP1217

Abstract

This paper presents a model of financial resource curse, i.e. episodes of abundant access to foreign capital coupled with weak productivity growth. We study a two-sector, tradable and non-tradable, small open economy. The tradable sector is the engine of growth, and productivity growth is increasing in the amount of labor employed by firms in the tradable sector. A period of large capital inflows, triggered by a fall in the interest rate, is associated with a consumption boom. While the increase in tradable consumption is financed through foreign borrowing, the increase in non-tradable consumption requires a shift of productive resources toward the non-tradable sector at the expenses of the tradable sector. The result is stagnant productivity growth. We show that capital controls can be welfare-enhancing and can be used as a second best policy tool to mitigate the misallocation of resources during an episode of financial resource curse.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/_new/publications/series.asp?...
Additional Information: © 2013 The Authors
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
Sets: Departments > Economics
Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Series: Working Papers > CEP Discussion Papers
Date Deposited: 08 Aug 2013 10:57
Last Modified: 08 Aug 2013 10:57
URI: http://eprints.lse.ac.uk/id/eprint/51557

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