Optimal Development Policies with Financial Frictions / Oleg Itskhoki, Benjamin Moll.

Format:

Book

Author/Creator:

Itskhoki, Oleg.

Contributor:

National Bureau of Economic Research.

Moll, Benjamin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19994.

NBER working paper series no. w19994

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

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.

Notes:

Print version record

March 2014.