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

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

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

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9293.

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Date of creation: Jan 2013
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Handle: RePEc:cpr:ceprdp:9293
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