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Reserve financing and government infrastructure investment: An application to China
Authors:Yin Germaschewski
Institution:Department of Economics, Indiana University, Bloomington, IN 47405, United States
Abstract:This paper proposes a novel financing scheme, reserve financing, for government infrastructure investment in China. A two-sector open economy model explores the consequences and policy implications of a surge in infrastructure investment financed by international reserves. The results show that reserve financing, coupled with a managed float exchange rate system, can maintain the country's fast growth rate while mitigating fiscal pressure on local governments. Productive infrastructure capital stimulates domestic demand, reducing the country's dependence on exports. To promote growth and maintain price stability, three factors are critical: return on infrastructure, swift fiscal adjustment, and rapid infrastructure financing.
Keywords:O11  O23  F43  H54
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