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Liberalization of Capital Movements and Trade: Real Appreciation, Employment and Welfare

Author

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  • Pertti Haaparanta
  • Juha Kähkönen

Abstract

A two-period, two-sector optimizing model is used to study the effects of liberalization of trade and capital movements on the real exchange rate, unemployment, and welfare. The mechanism creating unemployment is assumed to be real wage rigidity caused by wage indexation. Due to this distortion, neither free trade nor free capital mobility is in general optimal. It is shown that in the short run liberalization leads to real appreciation while in the long run the picture is not as clear especially regarding trade liberalization.

Suggested Citation

  • Pertti Haaparanta & Juha Kähkönen, 1986. "Liberalization of Capital Movements and Trade: Real Appreciation, Employment and Welfare," WIDER Working Paper Series wp-1986-005, World Institute for Development Economic Research (UNU-WIDER).
    • Handle: RePEc:unu:wpaper:wp-1986-005
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    File URL: https://www.wider.unu.edu/sites/default/files/WP5.pdf
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    References listed on IDEAS

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    1. Jeremy Greenwood & Kent P. Kimbrough, 1985. "Capital Controls and Fiscal Policy in the World Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 18(4), pages 743-765, November.
    2. Buffie, Edward F., 1984. "The macroeconomics of trade liberalization," Journal of International Economics, Elsevier, vol. 17(1-2), pages 121-137, August.
    3. Buffie, Edward F, 1985. "Price-Output Dynamics, Capital Inflows and Real Appreciation," Oxford Economic Papers, Oxford University Press, vol. 37(4), pages 529-551, December.
    4. J. Peter Neary, 1985. "International Factor Mobility, Minimum Wage Rates, and Factor-Price Equalization: A Synthesis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(3), pages 551-570.
    5. Edwards, Sebastian & van Wijnbergen, Sweder, 1986. "The Welfare Effects of Trade and Capital Market Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 141-148, February.
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    Citations

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    Cited by:

    1. Sebastian Edwards, 1987. "Tariffs, Terms of Trade, and the Real Exchange Rate in an Intertemporal Optimizing Model of the Current Account," NBER Working Papers 2175, National Bureau of Economic Research, Inc.
    2. Sebastian Edwards, 1987. "Anticipated Protectionist Policies, Real Exchange Rates and the Current Account," UCLA Economics Working Papers 437, UCLA Department of Economics.
    3. Grzegorz W. Kolodko & Marian Ostrowski & Dariusz Rosati, 1990. "Stabilization Policy in Poland: Challenges and Constraints," WIDER Working Paper Series wp-1990-081, World Institute for Development Economic Research (UNU-WIDER).

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