Trade and Domestic Financial Market Reform Under Political Uncertainty Implications for Investment, Savings, and the Real Exchange Rate

34 Pages Posted: 3 Feb 2006

Date Written: October 2000

Abstract

This paper presents a model that incorporates uncertainty about trade reform and analyzes the effects of trade and financial liberalization on domestic investment and savings, the current account balance and the real exchange rate, both when the capital account is open and when it is closed. Under certain assumptions financial liberalization leads to a movement of resources in the opposite direction to that implied by trade liberalization and to real exchange rate appreciation, thus defeating one of the objectives of tariff reform, when the capital account is open. When political economy linkages are taken into account, however, the indirect effects of financial liberalization may offset the direct effects, encouraging a movement of resources in the desired direction. With a closed capital account these results should still hold unless there are strong negative income effects from trade reform.

Keywords: Investment uncertainty political economy financial liberalization trade liberalization

JEL Classification: E21, E22, E25, F1, F21

Suggested Citation

Bhattacharya, Rina, Trade and Domestic Financial Market Reform Under Political Uncertainty Implications for Investment, Savings, and the Real Exchange Rate (October 2000). IMF Working Paper No. 00/175, Available at SSRN: https://ssrn.com/abstract=880229

Rina Bhattacharya (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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