Working Paper: NBER ID: w2162
Authors: 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.
Keywords: real exchange rate; capital account liberalization; tariff reduction; economic liberalization
JEL Codes: F31; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reduction in import tariffs (F13) | equilibrium real exchange rate (RER) (F31) |
| capital account liberalization (F32) | equilibrium real exchange rate (RER) (F31) |
| capital account liberalization (F32) | increased consumption (E21) |
| increased consumption (E21) | equilibrium real exchange rate (RER) (F31) |