Commercial policy and the current account: A Mussa-Neary approach

Abstract

The paper examines the effect of commercial policies on the current account for the case of a small open economy, in which capital is sector-specific in the short run but mobile in the long run. In the context of a two period model, trade liberalisation increases income by more in the long run than in the short run; consumption smoothing thus implies that the economy runs an external deficit in the short run. The analysis considers both tariff and quota liberalisation, and looks at the implications of wage rigidity.