Credibility, real interest rates, and the optimal speed of trade liberalization
AbstractThis paper investigates the effects of imperfectly credible trade liberalization programs on welfare and the allocation of real resources. We present a rational expectations model in which a government, with limited access to international financial markets may be forced to abort a liberalization program if hard-currency reserves are depleted too quickly. The liberalization's lack of perfect credibility arts as a distortion which becomes (rationally) intensified under the typical first-best policy of a direct move to free trade. A gradual lowering of trade barriers turns out to he welfare-superior to an immediate liberalization, and to improve the chance that. the program will ultimately succeed. We then derive the optimal speed of liberalization, the intertemporal allocation of resources, and the liberalization program's credibility.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Economics.
Volume (Year): 25 (1988)
Issue (Month): 1-2 (August)
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Web page: http://www.elsevier.com/locate/inca/505552
Other versions of this item:
- Kenneth A. Froot, 1989. "Credibility, Real Interest Rates, and the Optimal Speed of Trade Liberalization," NBER Working Papers 2358, National Bureau of Economic Research, Inc.
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