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External Constraints and Endogenous Growth: Why Didn't Some Countries Benefit From Capital Flows?

Gente, Karine, Leon-Ledesma, Miguel A., Nourry, Carine (2015) External Constraints and Endogenous Growth: Why Didn't Some Countries Benefit From Capital Flows? Journal of International Money and Finance, 56 . pp. 223-249. ISSN 0261-5606. (doi:10.1016/j.jimonfin.2014.09.007)

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Abstract

Empirical evidence on the growth benefits of capital inflows is mixed. The growth benefits accruing from capital inflows also appear to be larger for high savings countries. We explain this phenomenon using an OLG model of endogenous growth in open economies with borrowing constraints that can generate both positive and negative growth effects of capital inflows. The amount an economy can borrow is restricted by an endogenous enforcement constraint. In our setting, with physical capital and a pay-as-you-go pensions system, the steady state is unique. However, it can either be constrained or unconstrained. In a constrained economy, opening up to equity and FDI inflows can be bad for growth because it makes the domestic interest rate too low, which endogenously tightens borrowing constraints. Agents decrease savings and investment in productivity-enhancing activities resulting in lower growth. Results are reversed in an unconstrained economy. We also provide a quantitative analysis of these constraints and some policy implications.

Item Type: Article
DOI/Identification number: 10.1016/j.jimonfin.2014.09.007
Uncontrolled keywords: Overlapping generations; endogenous credit constraint; capital flows; endogenous growth
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculties > Social Sciences > School of Economics
Depositing User: Miguel Leon-Ledesma
Date Deposited: 01 Oct 2014 09:35 UTC
Last Modified: 11 Jun 2019 09:24 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/43157 (The current URI for this page, for reference purposes)
Leon-Ledesma, Miguel A.: https://orcid.org/0000-0002-3558-2990
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