Trade Liberalization, Macroeconomic Adjustment, and Welfare: Unifying Trade and Macro Models

By Ehsan U. Choudhri, Hamid Faruqee, Stephen Tokarick

December 1, 2006

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Format: Chicago

Ehsan U. Choudhri, Hamid Faruqee, and Stephen Tokarick. Trade Liberalization, Macroeconomic Adjustment, and Welfare: Unifying Trade and Macro Models, (USA: International Monetary Fund, 2006) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Trade liberalization leads to long-run gains, but it can also involve costly short-run macroeconomic adjustment. The paper explores the relative importance of these effects within a dynamic general equilibrium model that captures key elements of both international trade and macroeconomic models. The welfare effect of trade liberalization is decomposed into a steady-state efficiency gain and a transitional loss associated with wage-price stickiness. Our estimates show that the transitional loss is small relative to the steady-state gain, and tends to be lower under flexible as compared to fixed exchange rates. We also show that the loss can be reduced further by a flexible price-level targeting policy rule.

Subject: Consumption, Conventional peg, Exchange rate flexibility, Tariffs, Trade liberalization

Keywords: Exchange rate, Monetary policy, Price level, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/304
Stock No:

WPIEA2006304
ISBN:

9781451865646
ISSN:

1018-5941

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