On the employment, investment, and current account effects of trade liberalizations with durability in consumption

The effects of trade liberalizations are studied for a small open economy in a model with durable goods. A trade liberalization increases the permanent income of the representative agent, because it removes trade distortions. The increase in permanent income leads to a corresponding increase in the steady state stock of durable goods, and a fall in labor supply. The fall in labor input reduces investment, which tends to generate a current account surplus. To increase the stock of durables savings falls, which tend to generate a current account deficit. The adjustment of the current account will likely be non-monotonic.