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Trade reforms and current account imbalances

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  • Ju, Jiangdong
  • Shi, Kang
  • Wei, Shang-Jin

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 "corrections". JEL Classification Numbers: F3 and F4

Suggested Citation

  • Ju, Jiangdong & Shi, Kang & Wei, Shang-Jin, 2013. "Trade reforms and current account imbalances," BOFIT Discussion Papers 25/2013, Bank of Finland, Institute for Economies in Transition.
  • Handle: RePEc:bof:bofitp:2013_025
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    References listed on IDEAS

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    Cited by:

    1. Héctor Fabio Ríos Hernández & Jorge Mario Salcedo Mayorga & Marco Fidel Amado García, 2014. "Relación entre los aportes parafiscales y la demanda laboral para el sector manufacturero en Colombia (2001-2010)," REVISTA EQUIDAD Y DESARROLLO, UNIVERSIDAD DE LA SALLE, November.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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