Trade Reform, Policy Uncertainty and the Current Account: A Non-Expected Utility Approach

Sweder van Wijnbergen

No 441, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Rapid trade liberalization is often followed by a decline in private savings, although permanent changes in trade policy do not affect intertemporal prices and should thus leave private savings unaffected. But a positive probability of future policy reversal lowers the consumption rate of interest and thus will increase current consumption. Furthermore, to separate the impact of shifts in intertemporal relative prices and of risk aversion, we use the Ordinal Certainty Equivalence approach. We establish that trade policy uncertainty per se will further reduce savings if: (a) there is positive risk aversion; (b) the intertemporal substitution elasticity exceeds one.

Keywords: Consumption; Saving; Trade Policy (search for similar items in EconPapers)
JEL-codes: E21 F13 (search for similar items in EconPapers)
Date: 1990-08
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Related works:
Journal Article: Trade Reform, Policy Uncertainty, and the Current Account: A Non-Expected-Utility Approach (1992)
Working Paper: Trade Reform, Policy Uncertainty and the Current Account: A Non-Expected Utility Approach (1991)
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