Abstract

We develop a two-period, two-country, multi-good model with endogenous investment and credit flows between the countries. Credit is subject to quantitative restrictions. With an exogenous restriction, we analyze the welfare e®ects of a number of policy instruments used by the borrowing country. We then consider three scenarios under which a lender country optimally decides the level of credit and a borrower country chooses an import tari®: one in which the two countries act simultaneously and two scenarios where one of them has a first-mover advantage. The equilibrium under the leadership by the borrower — but not that by the lender — country is Pareto superior to the Nash equilibrium.

JEL Classification: F13, O10, O16.

Keywords: Trade intervention, investment credit, credit constraints, credit control, leaderfollower.

JEL Classification: F13, O10, O16.

Keywords: Trade intervention, investment credit, credit constraints, credit control, leaderfollower.

z Department of Economics and Accounting, University of Liverpool, Liverpool L69 7ZH, U.K; E-mail: sjafarey@liv.ac.uk

x Department of Economics, Southern Illinois University Carbondale, Carbondale, IL. 62901-4515, U.S.A.; and University of Essex, U.K; E-mail: lahiri@siu.edu