Liberalization Policies and Welfare in a Financially Repressed Economy

Abstract

This paper studies the effect on welfare of three types of liberalization policy (financial deregulation, relaxation of capital controls, and trade liberalization) assuming, realistically, that in the short run all markets cannot be liberalized simultaneously. An intertemporal general-equilibrium model with two traded goods is utilized to show that partial reforms, which in the long run are beneficial, may well result in welfare losses in the short run. In particular, contrary to the standard view, raising the deposit rate may reduce welfare in the presence of tariffs, while tariffs can raise welfare when financial repression discourages saving.