Van Wijnbergen, S. (1985). Trade reform, aggregate investment and capital flight. On credibility and the value of information Economics Letters, 19(4):369--372.
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Affiliated authorSweder van Wijnbergen
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Publication year1985
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JournalEconomics Letters
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.