Optimal Development Policies with Financial Frictions

61 Pages Posted: 24 Mar 2014 Last revised: 6 Aug 2014

See all articles by Oleg Itskhoki

Oleg Itskhoki

Princeton University - Department of Economics

Benjamin Moll

Princeton University - Department of Economics

Date Written: March 2014

Abstract

We study optimal dynamic Ramsey policies in a standard growth model with financial frictions. For developing countries with low financial wealth, the optimal policy intervention increases labor supply and lowers wages, resulting in higher entrepreneurial profits and faster wealth accumulation. This in turn relaxes borrowing constraints in the future, leading to higher labor productivity and wages. The use of additional policy instruments, such as subsidized credit, may be optimal as well. In the long run, the optimal policy reverses sign. Taking advantage of the tractability of our framework, we extend the model to study its implications for optimal exchange rate and sectoral industrial policies.

Suggested Citation

Itskhoki, Oleg and Moll, Benjamin, Optimal Development Policies with Financial Frictions (March 2014). NBER Working Paper No. w19994. Available at SSRN: https://ssrn.com/abstract=2413342

Oleg Itskhoki (Contact Author)

Princeton University - Department of Economics ( email )

Fisher 306
Princeton, NJ 08544-1021
United States
+1 (609) 258-5493 (Phone)

HOME PAGE: http://www.princeton.edu/~itskhoki

Benjamin Moll

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
8
Abstract Views
304
PlumX Metrics