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The financial resource curse

Benigno, Gianluca and Fornaro, Luca (2014) The financial resource curse. Scandinavian Journal of Economics, 116 (1). pp. 58-86. ISSN 1467-9442

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Identification Number: 10.1111/sjoe.12047

Abstract

In this paper, we present a model of the financial resource curse (i.e., episodes of abundant access to foreign capital coupled with weak productivity growth). We study a two-sector (i.e., tradable and non-tradable) small open economy. The tradable sector is the engine of growth, and productivity growth is increasing with 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: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/%28...
Additional Information: © 2013 The editors of The Scandinavian Journal of Economics
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Economics
Date Deposited: 22 Jan 2014 14:24
Last Modified: 22 Jan 2014 14:24
URI: http://eprints.lse.ac.uk/id/eprint/55400

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