Three essays on economic liberalization

Many countries have attempted to alter their economic structure by reducing the existing distortions such as tariffs and restrictions on capital movements. The first essay re-examines Aizenman\u27s (1985) results on the effects of capital controls during unanticipated trade liberalization using an intertemporal optimizing monetary model. Aizenman\u27s model is based on the currency substitution model where foreign money is generally held for liquidity services. Unlike the model used in Aizenman (1985), foreign money in this paper is an interest-bearing asset and its major role is intertemporal consumption smoothing. This modification leads to an important change. Aizenman\u27s results are reversed. This result suggests that the effects of imposing capital controls during trade liberalization are very different depending on the role of foreign money in each country. The second essay examines the speed of trade liberalization using an intertemporal optimizing model. Any process of structural reform will require a costly adjustment period during which resources are reallocated. Adjustment costs are modelled to depend on the speed of adjustment. It is shown that adjustment costs can be rapidly reduced by slowing down the reduction of tariffs. A gradual reduction of import tariffs may be preferred to a cold turkey liberalization from a political economy perspective or for income distribution reasons if lump-sum transfers are not available. The third essay studies the effects of capital account liberalization. The model to be presented is an intertemporal optimizing monetary model to analyze the effects of opening the capital account through a channel of relaxing restrictions on the portfolio composition. Foreign assets are assumed to be scarce in the economy. Contrary to other papers, therefore, the liberalization of the capital account means an increase in the stock of foreign bonds held by the domestic residents. It is shown that corresponding to individual\u27s desire to adjust money balances, an unanticipated and an anticipated capital account liberalization result in the current account surpluses and the depreciation of the real exchange rate in the short run