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Trade Liberalization, Macroeconomic Adjustment, and Welfare

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Author Info

  • Ehsan U. Choudhri
  • Hamid Faruqee
  • Stephen Tokarick

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/304.

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Length: 26
Date of creation: 01 Dec 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/304

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Related research

Keywords: Economic conditions; Economic models; trade liberalization; exchange rates; exchange rate; flexible exchange rates; fixed exchange rates; exchange rate regimes; exchange rate regime; elasticity of substitution; tariff reduction; trade models; international trade; effects of trade liberalization; tariff cuts; exchange rate policy; flexible exchange rate; fixed exchange rate; current account balance; tariff rates; home currency; closed economy; tariff cut; trade restrictions; imperfect competition; open economy; flexible exchange rate regimes; tariff rate; policy regimes; equilibrium model; flexible exchange rate policy; import tariff; trade reform; fixed exchange rate regime; imported goods; alternative exchange rate regimes; alternative exchange rate; currency depreciation; aggregate consumption; free trade agreements; current account surplus; trade barriers; domestic goods; product differentiation; employment policy; tariff revenue; policy of fixed exchange rates; exchange rate dynamics; tariff barriers; fixed exchange rate policy; free trade; world economy; net exporter; unilateral reduction; flexible exchange rate regime; transition period; political economy; import tariffs; real exchange rates; exchange rate regime durability; trade taxes; changes in trade; nominal interest rate; non-tariff barriers; trade agreements; exchange rate float; closed economies; liberalizing trade; commercial policy; trade effects; intermediate inputs; floating exchange rate; agricultural trade reform;

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References

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  1. Aasim M. Husain & Ashoka Mody & Kenneth S. Rogoff, 2004. "Exchange Rate Regime Durability and Performance in Developing Countries Versus Advanced Economies," NBER Working Papers 10673, National Bureau of Economic Research, Inc.
  2. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 533-63, July.
  3. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc.
  4. Russell S. Boyer, 1977. "Commercial Policy under Alternative Exchange Rate Regimes," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 218-32, May.
  5. Bayoumi, Tamim & Laxton, Douglas & Pesenti, Paolo, 2004. "Benefits and spillovers of greater competition in Europe: a macroeconomic assessment," Working Paper Series 0341, European Central Bank.
  6. Obstfeld, Maurice, 2004. "Globalization, Macroeconomic Performance, and the Exchange Rates of Emerging Economies," Center for International and Development Economics Research, Working Paper Series qt7q670769, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  8. Obstfeld, Maurice, 2004. "Globalization, Macroeconomic Performance, and the Exchange Rates of Emerging Economies: Keynote Speech," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(S1), pages 29-55, December.
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Cited by:
  1. Kim, Sunghyun H. & Kose, M. Ayhan, 2014. "Welfare implications of trade liberalization and fiscal reform: A quantitative experiment," Journal of International Economics, Elsevier, vol. 92(1), pages 198-209.

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