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Reversible reforms with irreversible capital: The investment response to imperfectly credible trade liberalisation

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  • Richard Mash

Abstract

The paper considers the irreversible investment response to trade liberalisation when agents perceive there to be a positive probability that the liberalisation may be reversed. It is shown that even with full credibility the aggregate investment response may be weak since investment will collapse in the unfavoured sector as a result of the change in domestic relative prices. Limited credibility reduces the investment response in the favoured sector and hence reduces aggregate investment. The effect is particularly strong if investment involves delivery lags before new capital becomes productive. The paper also demonstrates a new solution method for irreversible investment problems of this type.

Suggested Citation

  • Richard Mash, 1997. "Reversible reforms with irreversible capital: The investment response to imperfectly credible trade liberalisation," CSAE Working Paper Series 1997-06, Centre for the Study of African Economies, University of Oxford.
    • Handle: RePEc:csa:wpaper:1997-06
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    File URL: http://www.csae.ox.ac.uk/materials/papers/9706text.pdf
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    Cited by:

    1. Richard Mash, 1999. "The Investment Response to Imperfectly Credible Trade Liberalisation with Endogenous Probability of Reversal," Economics Series Working Papers WPS/1998-13, University of Oxford, Department of Economics.

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