Trade Reforms and Current Account Imbalances: When Does the General Equilibrium Effect Overturn a Partial Equilibrium Intuition

Shang-Jin Wei, Kang Shi and Jiandong Ju

No 9293, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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

JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-opm
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