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International Credit and Welfare: A Paradoxical Theorem and its Policy ImplicationsKaushik BasuCornell University - Department of Economics; Harvard University - Harvard Institute of Economic Research; Institute for the Study of Labor (IZA) Hodaka MoritaUniversity of New South Wales - School of Economics January 26, 2005 MIT Department of Economics Working Paper No. 02-18 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.
Number of Pages in PDF File: 38 Keywords: Bank-firm interaction, foreign aid, international credit, welfare comparison JEL Classification: L10, F30, O10 working papers seriesDate posted: March 2, 2005Suggested CitationContact Information
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