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Shock Versus Gradualism in Models of Rational Expectations

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  • Leonardo Auernheimer
  • Susan Mary George

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 97/122.

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Length: 20
Date of creation: 01 Sep 1997
Date of revision:
Handle: RePEc:imf:imfwpa:97/122

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Cited by:
  1. S. Nuri Erbas, 2002. "Primeron Reforms in a Second-Best Ambiguous Environment," IMF Working Papers 02/50, International Monetary Fund.

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