DP441 Trade Reform, Policy Uncertainty and the Current Account : A Non-Expected Utility Approach

Author(s): Sweder van Wijnbergen
Publication Date: August 1990
Keyword(s): Consumption, Saving, Trade Policy
JEL(s): E21, F13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=441

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.