Shock Versus Gradualism in Models of Rational Expectations: The Case of Trade Liberalization
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
Summary:
This paper provides a new argument for “shock” versus “gradualism” in the implementation of trade policies. In the simple context of a small open economy with rational expectations, we consider the comparative welfare effects of eliminating an import tariff either immediately as an unanticipated shock, or gradually over a preannounced length of time. The gradualist policy introduces a distortion in consumption-accumulation decisions and generates welfare costs. And if the gradual change is extended over “too long” a period, these costs may exceed the long-run benefits of liberalization.
Series:
Working Paper No. 1997/122
Subject:
Commodities Consumption Foreign assets Tariffs Trade liberalization
English
Publication Date:
September 1, 1997
ISBN/ISSN:
9781451854459/1018-5941
Stock No:
WPIEA1221997
Pages:
20
Please address any questions about this title to publications@imf.org