Trade Reforms and Current Account Imbalances

57 Pages Posted: 22 Dec 2012 Last revised: 21 Jun 2023

See all articles by Jiandong Ju

Jiandong Ju

Tsinghua University - PBC School of Finance

Kang Shi

The Chinese University of Hong Kong (CUHK) - Department of Economics

Shang-Jin Wei

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: December 2012

Abstract

This paper studies the effects of trade liberalization on capital flows in a dynamic Heckscher-Ohlin model, and makes four contributions. First, we identify an interest rate over-determination problem in such a model, and solve it with an endogenous discount factor. Second, we show that a trade liberalization in a developing country generally leads to a greater current account surplus, which is the exact opposite of a common but partial equilibrium intuition. Third, factor market reforms reinforce the effect of the trade liberalization on capital outflows. Finally, our calibrations suggest that China’s accession to the WTO is likely an important factor driving the rise of its current account surplus.

Suggested Citation

Ju, Jiandong and Shi, Kang and Wei, Shang-Jin, Trade Reforms and Current Account Imbalances (December 2012). NBER Working Paper No. w18653, Available at SSRN: https://ssrn.com/abstract=2192826

Jiandong Ju (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Kang Shi

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong

Shang-Jin Wei

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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