Working Paper: CEPR ID: DP441
Authors: Sweder van Wijnbergen
Abstract: Rapid trade liberalization is often followed by a decline in private savings, although permanent changes in trade policy do not affect intertemporal prices and should thus leave private savings unaffected. But a positive probability of future policy reversal lowers the consumption rate of interest and thus will increase current consumption. Furthermore, to separate the impact of shifts in intertemporal relative prices and of risk aversion, we use the Ordinal Certainty Equivalence approach. We establish that trade policy uncertainty per se will further reduce savings if: (a) there is positive risk aversion; (b) the intertemporal substitution elasticity exceeds one.
Keywords: trade liberalization; savings; policy reversal; nonexpected utility
JEL Codes: 422; 432
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| positive probability of future tariff reimposition (F17) | expected consumption rate of interest (E43) |
| expected consumption rate of interest (E43) | current consumption (E20) |
| intertemporal substitution elasticity > 1 (D15) | decline in private savings (D14) |
| policy uncertainty (D89) | private savings (D14) |
| policy uncertainty + anticipated policy reversal (D84) | current consumption (E20) |