Liberalization Policies and Welfare in a Financially Repressed Economy

Political Economy Aspects of Trade and Financial Liberalization: Implications for Sequencing

“…It is interesting to compare these results with those in Kahkonen (1987). The main policy conclusions ofthat arise from Kahkonen's model are that domestic financial liberalization (raising the deposit rate of interest and removing the 'tax' on household savings) may reduce welfare if tariffs are present, whereas tariffs can raise welfare when financial repression discourages savings.…”

“…Kahkonen concludes that, although "recommendations about the optimal order of liberalization based on the relatively simple model presented here should be interpreted cautiously, it appears that a simultaneous liberalization of trade and domestic financial markets would be beneficial in a financially repressed economy, whether capital movements are regulated or not." (Kahkonen (1987), pp. 543).…”

“…One of the main differences between our model and that of Kahkonen (1987) is that households in our model are assumed not to consume the capital-intensive importable good subject to the tariff. Consequently in our model the presence of a first period tariff does not encourage a shift in consumption to the second period and therefore does not give rise to excess savings.…”

“…The main exception to this is Kahkonen (1987), which looks at the welfare effects of three types of structural reforms-financial deregulation, relaxation of capital controls, and trade liberalization-in an intertemporal general equilibrium setting with two traded goods. There is no element of uncertainty in Kahkonen's model-issues regarding credibility of government policy are not discussed.…”

“…However, it introduces uncertainty about trade reform and analyses its effects on domestic savings, investment and resource allocation. Moreover, the emphasis here is on resource allocation across sectors, whereas the emphasis in Kahkonen (1987) is on intertemporal resource allocation.…”