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The Liberalization of the Current Capital Accounts and the Real ExchangeRate

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  • Sebastian Edwards

Abstract

In this paper a general equilibrium intertemporal model with optimizing consumers and producers is developed to analyze how different policies geared at liberalizing the current and capital accounts of the balance of payments affect the equilibrium real exchange rate (RER). In particular, the effects of a reduction in the level of import tariffs and of a change in the tax on foreign borrowing on the equilibrium RER are investigated. In the case of import tariffs, both a temporary and an anticipated liberalization are considered. It is shown that in the case of tariffs reduction it is not possible to know a priori whether the equilibrium RER will appreciate or depreciate. However, a liberalization of the capital account will always result in an equilibrium real appreciation in the current period. It is then argued that analyses of this type are essential to evaluate whether observed movements in the RER represent a misalignment situation or if they are an equilibrium phenomenon. The case of the recent liberalization attempts in the Southern Cone are also discussed.

Suggested Citation

  • Sebastian Edwards, 1987. "The Liberalization of the Current Capital Accounts and the Real ExchangeRate," NBER Working Papers 2162, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2162
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    References listed on IDEAS

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    1. Aizenman, Joshua, 1985. "Tariff liberalization policy and financial restrictions," Journal of International Economics, Elsevier, vol. 19(3-4), pages 241-255, November.
    2. Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
    3. Anne O. Krueger, 1978. "Foreign Trade Regimes and Economic Development: Liberalization Attempts and Consequences," NBER Books, National Bureau of Economic Research, Inc, number krue78-1.
    4. Neary, J Peter, 1978. "Short-Run Capital Specificity and the Pure Theory of International Trade," Economic Journal, Royal Economic Society, vol. 88(351), pages 488-510, September.
    5. Jeffrey A. Frankel, Kenneth A. Froot, and Alejandra Mizala Salces., 1987. "Credibility, the Optimal Speed of Trade Liberalization, Real Interest Rates, and the Latin American Debt," Economics Working Papers 8750, University of California at Berkeley.
    6. Dornbusch, Rudiger, 1974. "Tariffs and nontraded goods," Journal of International Economics, Elsevier, vol. 4(2), pages 177-185, May.
    7. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
    8. Harberger, Arnold C., 1983. "Dutch disease -- how much sickness, how much boon?," Resources and Energy, Elsevier, vol. 5(1), pages 1-20, March.
    9. Harry G. Johnson, 1966. "A Model of Protection and the Exchange Rate," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 33(2), pages 159-163.
    10. Hanson, James & de Melo, Jaime, 1985. "External shocks, financial reforms, and stabilization attempts in Uruguay during 1974-1983," World Development, Elsevier, vol. 13(8), pages 917-939, August.
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    Cited by:

    1. Bodart, Vincent & Candelon, Bertrand & Carpantier, Jean-Francois, 2015. "Real exchanges rates, commodity prices and structural factors in developing countries," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 264-284.
    2. Sebastian Edwards, 1989. "On the Sequencing of Structural Reforms," OECD Economics Department Working Papers 70, OECD Publishing.

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