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Trade reforms and current account imbalances

Jiangdong Ju, Kang Shi () and Shang-Jin Wei

No 25/2013, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

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 Classification Numbers: F3 and F4

Date: 2013-09-05
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Published in Published in Journal of International Economics, Volume 92, Supplement 1, April 2014, Pages S36–S51 as On the connections between intra-temporal and intertemporal trades

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