Working Paper: NBER ID: w18653
Authors: Jiandong Ju; Kang Shi; Shangjin Wei
Abstract: This paper studies the effects of trade liberalization on capital flows in a dynamic Heckscher-Ohlin model, and makes four contributions. First, we identify an interest rate over-determination problem in such a model, and solve it with an endogenous discount factor. Second, we show that a trade liberalization in a developing country generally leads to a greater current account surplus, which is the exact opposite of a common but partial equilibrium intuition. Third, factor market reforms reinforce the effect of the trade liberalization on capital outflows. Finally, our calibrations suggest that China’s accession to the WTO is likely an important factor driving the rise of its current account surplus.
Keywords: trade liberalization; current account surplus; dynamic Heckscher-Ohlin model; China; WTO accession
JEL Codes: F21; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade liberalization (F13) | Current account surplus (F32) |
| Reductions in trade barriers (F13) | Capital outflows (F32) |
| Capital outflows (F32) | Current account surplus (F32) |
| Factor market reforms (P23) | Effect of trade liberalization on capital outflows (F32) |
| Trade liberalization + Factor market reforms (F16) | Current account surplus (F32) |
| China's WTO accession (F13) | Current account surplus (F32) |