BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 25/2013:
Trade reforms and current account imbalances
Jiandong Ju ()
, Kang Shi ()
and Shang-Jin Wei ()
Abstract: In partial equilibrium, a reduction in import barriers may
be thought to lead to an increase in imports and a reduction in trade
surplus. However, the general equilibrium effect can go in the opposite
direction. We study how trade reforms affect current accounts by embedding
a modified Heckscher-Ohlin structure and an endogenous discount factor into
an intertemporal model of current account. We show that trade
liberalizations in a developing country would generally lead to capital
outflow. In contrast, trade liberalizations in a developed country would
result in capital inflow. Thus, efficient trade reforms can contribute to
global current account imbalances, but these imbalances do not need policy
"corrections".
JEL-Codes: F32; F49; (follow links to similar papers)
49 pages, September 4, 2013
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