On the distributional effects of trade policy: Dynamics of household saving and asset prices

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Abstract

This paper studies the effect of trade liberalization on inequality. We develop a theoretical framework that generates economy-wide distributions of wealth and income for different levels of trade protection. The model unambiguously determines the effect of liberalization on inequality; and rationalizes why larger inequality can be the outcome of a welfare enhancing policy, as households reduce their buffer savings when liberalization lowers the price of food. The framework reconciles the increase in inequality, the fall in the value of land, and farmers' opposition to freer trade, that have featured in different liberalization episodes. We also present empirical support for the model's predictions.

Original languageEnglish
Pages (from-to)944-970
Number of pages27
JournalQuarterly Review of Economics and Finance
Volume49
Issue number3
DOIs
StatePublished - 1 Aug 2009

Keywords

  • Agriculture
  • Heterogeneous agents
  • Inequality
  • Trade liberalization
  • Trade policy

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