Trade Reforms and Current Account Imbalances
57 Pages Posted: 22 Dec 2012 Last revised: 21 Jun 2023
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Trade Reforms and Current Account Imbalances
Trade Reforms and Current Account Imbalances: When Does the General Equilibrium Effect Overturn a Partial Equilibrium Intuition?
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.
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