Trade and Domestic Financial Market Reform Under Political Uncertainty Implications for Investment, Savings, and the Real Exchange Rate
34 Pages Posted: 3 Feb 2006
Date Written: October 2000
Abstract
This paper presents a model that incorporates uncertainty about trade reform and analyzes the effects of trade and financial liberalization on domestic investment and savings, the current account balance and the real exchange rate, both when the capital account is open and when it is closed. Under certain assumptions financial liberalization leads to a movement of resources in the opposite direction to that implied by trade liberalization and to real exchange rate appreciation, thus defeating one of the objectives of tariff reform, when the capital account is open. When political economy linkages are taken into account, however, the indirect effects of financial liberalization may offset the direct effects, encouraging a movement of resources in the desired direction. With a closed capital account these results should still hold unless there are strong negative income effects from trade reform.
Keywords: Investment uncertainty political economy financial liberalization trade liberalization
JEL Classification: E21, E22, E25, F1, F21
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Liberalization Policies and Welfare in a Financially Repressed Economy
-
Political Economy Aspects of Trade and Financial Liberalization: Implications for Sequencing
-
Shock Versus Gradualism in Models of Rational Expectations: The Case of Trade Liberalization
-
Primer on Reforms in a Second-Best Ambiguous Environment: A Case for Gradualism
-
Credibility, Irreversibility of Investment, and Liberalization Reforms in Ldcs
-
Impact of Financial Liberalization on Welfare: Evidence from Nepal