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

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  • Jiandong Ju
  • Kang Shi
  • Shang-Jin Wei

Abstract

While a reduction in import barriers in a partial equilibrium may be thought to lead to an increase in imports and a reduction in trade surplus, 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"

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18653.

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Date of creation: Dec 2012
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Handle: RePEc:nbr:nberwo:18653

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Cited by:
  1. Barattieri, Alessandro, 2014. "Comparative advantage, service trade, and global imbalances," Journal of International Economics, Elsevier, Elsevier, vol. 92(1), pages 1-13.
  2. Mina Kim & Deokwoo Nam & Jian Wang & Jason Wu, 2013. "International Trade Price Stickiness and Exchange Rate and Pass-Through in Micro Data: A Case Study on US-China Trade," Working Papers, Hong Kong Institute for Monetary Research 202013, Hong Kong Institute for Monetary Research.
  3. Fan, Shenggen & Kanbur, Ravi & Wei, Shang-Jin & Zhang, Xiaobo, 2014. "The Economics of China: Successes and Challenges," Working Papers, Cornell University, Department of Applied Economics and Management 180153, Cornell University, Department of Applied Economics and Management.
  4. Mina Kim, & Deokwoo Nam, & Jian Wang & Jason Wu,, 2013. "International Trade Price Stickiness and Exchange Rate Pass-through in Micro Data: A Case Study on US-China Trade," Working Papers, U.S. Bureau of Labor Statistics 467, U.S. Bureau of Labor Statistics.

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