Liberalization of Capital Movements and Trade: Real Appreciation, Employment and Welfare

Pertti Haaparanta and Juha Kähkönen

No wp-1986-005, WIDER Working Paper Series from World Institute for Development Economic Research (UNU-WIDER)

Abstract: A two-period, two-sector optimizing model is used to study the effects of liberalization of trade and capital movements on the real exchange rate, unemployment, and welfare. The mechanism creating unemployment is assumed to be real wage rigidity caused by wage indexation. Due to this distortion, neither free trade nor free capital mobility is in general optimal. It is shown that in the short run liberalization leads to real appreciation while in the long run the picture is not as clear especially regarding trade liberalization.

Keywords: Capital market; Commerce; Free trade (search for similar items in EconPapers)
Date: 1986
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Citations: View citations in EconPapers (5)

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