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Trade Reform, Policy Uncertainty and the Current Account : A Non-Expected Utility Approach

  • Van Wijnbergen, S.

Rapid trade liberalization is often followed by a decline in private savings, although permanent changes in trade policy do not affect intertemporal prices and should thus leave private savings unaffected. But a positive probability of future policy reversal lowers the consumption rate of interest and thus will increase current consumption. Furthermore, to separate the impact of shifts in intertemporal relative prices and of risk aversion, we use the Ordinal Certainty Equivalence approach. We establish that trade policy uncertainty per se will further reduce savings if: (a) there is positive risk aversion; (b) the intertemporal substitution elasticity exceeds one.

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Paper provided by Tilburg - Center for Economic Research in its series Papers with number 9148.

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Length: 28 pages
Date of creation: 1991
Date of revision:
Handle: RePEc:fth:tilbur:9148
Contact details of provider: Postal: TILBURG UNIVERSITY, CENTER FOR ECONOMIC RESEARCH, 5000 LE TILBURG THE NETHERLANDS.
Phone: 31 13 4663050
Fax: 31 13 4663066
Web page: http://center.uvt.nl/
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