International credit and welfare
Subtitle: some paradoxical results with implications for the organization of international lending
By: Kaushik Basu, Hodaka Morita
Contributors: Morita, Hodaka; Massachusetts Institute of Technology. Dept. of Economics
Edition: Rev.
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 02-18; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 02-18.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2005
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 31
Description: 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. Keywords: Bank-firm interaction, foreign aid, international credit, welfare comparison. JEL Classifications: L10, F30, O10
Notes: "April 2002. -- Revised: January 15, 2005."

Includes bibliographical references (p. 30-31).

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