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| Volume 1,
No. 1, April
2002 |
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Quantitative Restrictions and Foreign
Investment in a Monetary Economy
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| Chi-Chur
Chao |
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| Department
of Economics, The Chinese University of Hong Kong, Hong Kong |
| Eden
S. H. Yu |
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| Department
of Economics and Finance, City University of Hong Kong, Hong Kong |
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| Abstract |
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| This
paper examines the welfare effect of foreign investment under
quantitative restrictions for a host country with a
cash-in-advance constraint. This constraint results in a
divergence between the consumer virtual prices and the world
prices. If the cash required for purchasing exportable goods
exceeds that of the importable, additional foreign investment can
widen the price divergence and, thus, reduce welfare. This result
is contrary to the conventional view that foreign investment is
non-immiserizing under quantitative restrictions. On the other
hand, if the cash requirement is larger for buying importable
goods, foreign investment can still promote welfare.
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Key words:
foreign
investment; quantitative restrictions; cash in advance
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| JEL
classification: F11;
F21; E10 |
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