Trade and Domestic Financial Market Reform Under Political Uncertainty: Implications for Investment, Savings, and the Real Exchange Rate

October 1, 2000

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Format: Chicago

Rina Bhattacharya. Trade and Domestic Financial Market Reform Under Political Uncertainty: Implications for Investment, Savings, and the Real Exchange Rate, (USA: International Monetary Fund, 2000) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Capital account, Domestic savings, Foreign exchange, International trade, National accounts, Real exchange rates, Tariffs, Taxes, Trade liberalization

Keywords: Capital account, Domestic savings, Financial liberalization, Financial market, Investment, Maximization problem, Political economy, Rate of interest, Real exchange rates, Representative firm, Tariffs, Trade liberalization, Traded good, Uncertainty, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2000/175
Stock No:

WPIEA1752000
ISBN:

9781451858747
ISSN:

1018-5941

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