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Trade reform, policy uncertainty, and the current account

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  • van Wijnbergen, Sweder

Abstract

Rapid trade liberalization is often followed by a surge of imports and a deterioration in the current account. The macroeconomic counterpart of this is a decline in private savings. This paper discusses the impact of policy uncertainty on private savings. The author uses the Ordinal Certainty Equivalence approach to establish that trade policy uncertainty by itself will further reduce savings if: (a) there is a positive risk aversion; and (b) the intertemporal substitution elasticity exceeds 1. The result shows that, with positive risk aversion, policy uncertainty will in fact reinforce the negative savings impact of an anticipated policy reversal, especially when that negative impact is strong. This suggests that with high risk aversion and high intertemporal substitution, a rapid trade reform that is not fully credible may depress private savings significantly, with attendant negative impact on the current account.

Suggested Citation

  • van Wijnbergen, Sweder, 1990. "Trade reform, policy uncertainty, and the current account," Policy Research Working Paper Series 520, The World Bank.
    • Handle: RePEc:wbk:wbrwps:520
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    References listed on IDEAS

    as
    1. Rodrik, D., 1990. "Trade Policies And Development: Some New Issues," Papers 181d, Harvard - J.F. Kennedy School of Government.
    2. Philippe Weil, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 29-42.
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    Cited by:

    1. Azam, Jean-Paul & Bevan, David & Collier, Paul & Dercon, Stefan & Gunning, Jan & Pradhan, Sanjay, 1995. "Some economic consequences of the transition from civil war to peace," Policy Research Working Paper Series 1392, The World Bank.
    2. Yago, Milton & Morgan, Wyn, 2008. "The impact of policy reversal on economic performance in Sub-Saharan Africa," European Journal of Political Economy, Elsevier, vol. 24(1), pages 88-106, March.

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