Trade reform,aggregate investment and capital flight: On credibility and the value of information |
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Authors: | Sweder Van Wijnbergen |
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Institution: | The World Bank, Washington, DC 20433, USA;Centre for Economic Policy Research, London, UK |
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Abstract: | In this paper we demonstrate that uncertainty about future policy reversals coupled with irreversible investment confers an option value to foreign exchange and may lead to capital flight and a fall in aggregate investment after a trade reform. The analysis focuses on the value of information and the credibility of the policy reform. The conclusion points to a potential role for international institutions to prevent such problems. |
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