Optimal economic policy and growth in an open economy

Industrial policies have been used in almost all countries, some succeeded, and others failed. To study the relationship between subsidies, capital inflows growth, we develop an endogenous growth model with two sectors: a tradable non-tradable one. Technological knowledge is produced only sector through learning by doing, this available to firms. There country risk that depends positively on country's level of foreign debt. The market economy inefficient. We study, steady state, how responds when its government establishes optimal investment subsidy sector. Thus, employment are stimulated real exchange rate appreciates. As total wealth increases, ratio consumption increases. debt but higher than Pareto-optimal value. corrects overborrowing tax interest rate, so controls necessary for reach