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

  • Jiandong Ju
  • Kang Shi
  • Shang-Jin Wei

While a reduction in import barriers in a partial equilibrium may be thought to lead to an increase in imports and a reduction in trade surplus, 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"

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18653.

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Date of creation: Dec 2012
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Handle: RePEc:nbr:nberwo:18653
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