Quantitative Restrictions and Foreign Investment in a Monetary Economy

Abstract

This paper examines the welfare effect of foreign investment under quantitative restrictions_x000D_ 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_x000D_ 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_x000D_ can still promote welfare.