Working Paper: CEPR ID: DP1411
Authors: Joseph F. Francois; Bradley McDonald; Hakan Nordstrom
Abstract: This paper explores trade policy and investment linkages in a multicountry framework. This is done under alternative steady-state closure rules linking trade to consumption, production, and investment, and emphasizing the general equilibrium nature of capital accumulation mechanisms. When policy shocks are capital friendly, induced investment may be greater than suggested by current savings rates. As a result, multiplier-type analysis can be very misleading. The importance and direction of this magnification hinges critically on the sensitivity of savings rates with respect to real returns. As illustration, we offer a numerical assessment of the Uruguay Round, highlighting such linkages.
Keywords: trade and investment; trade and capital accumulation
JEL Codes: F4; F13; F47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade policy reforms (F13) | higher levels of investment (E22) |
| trade policy reforms (F13) | capital accumulation (E22) |
| increases in productivity (O49) | higher levels of investment (E22) |
| savings rates sensitivity to real returns (E43) | capital accumulation (E22) |
| fixed savings rates (E43) | simple multiple of static impact (C39) |
| endogenously determined savings (E21) | differing medium-run impacts from static impacts (C32) |
| induced effects on capital formation (E22) | reinforce or weaken static impacts (F69) |