The Financial Resource Curse

Gianluca Benigno and Luca Fornaro

No 9489, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper presents a model of financial resource curse, i.e. episodes of abundant access to foreign capital coupled with weak productivity growth. We study a two-sector, tradable and non-tradable, small open economy. The tradable sector is the engine of growth, and productivity growth is increasing in 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.

Keywords: Capital controls; Capital flows; Endogenous growth; The financial resource curse (search for similar items in EconPapers)
JEL-codes: F32 F34 F36 F41 F43 (search for similar items in EconPapers)
Date: 2013-05
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: The Financial Resource Curse (2014)
Working Paper: The Financial Resource Curse (2013)
Working Paper: The financial resource curse (2013)
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