On the Role of Financial Frictions and the Saving Rate during Trade Liberalizations

We study how financial frictions and the saving rate shape the long-run effects of trade liberalization on income, consumption and the distribution of wealth in financially underdevelopedeconomies. In our model, regardless of whether the capital account is open or not, trade liberalization reduces the share of wealth in the hands of entrepreneurs and may well reduce steadystate consumption and income. Furthermore, trade opening is more likely to reduce steady-state consumption and output, the higher is the level of financial development. For economies with anopen capital account, a higher saving rate also increases the likelihood that a trade liberalization leads to a reduction in steady-state consumption and output.