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Credibility, Real Interest Rates, and the Optimal Speed of Trade Liberalization

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  • Kenneth A. Froot

Abstract

This 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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2358.

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Date of creation: Mar 1989
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Publication status: published as Journal of International Economics, Vol. 25, pp. 71-93, (1988).
Handle: RePEc:nbr:nberwo:2358

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  1. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
  2. Jeffrey A. Frankel, Kenneth A. Froot, and Alejandra Mizala Salces., 1987. "Credibility, the Optimal Speed of Trade Liberalization, Real Interest Rates, and the Latin American Debt," Economics Working Papers 8750, University of California at Berkeley.
  3. McKinnon, Ronald I., 1982. "The order of economic liberalization: Lessons from Chile and Argentina," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17(1), pages 159-186, January.
  4. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-53, February.
  5. Maurice Obstfeld, 1984. "Capital Flows, the Current Account, and the Real Exchange Rate: Consequences of Liberalization and Stabilization," NBER Working Papers 1526, National Bureau of Economic Research, Inc.
  6. Sebastian Edwards & Sweder Van Wijnbergen, 1983. "The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios," UCLA Economics Working Papers 313, UCLA Department of Economics.
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Cited by:
  1. Robert C. Tatum, 2005. "Sustaining Imperfectly Credible Trade Liberalization: Do the Rate of Tariff Reduction and the Degree of Labor Mobility Matter?," International Finance 0506007, EconWPA.
  2. Conley, John P. & Maloney, William F., 1995. "Optimal sequencing of credible reforms with uncertain outcomes," Journal of Development Economics, Elsevier, vol. 48(1), pages 151-166, October.
  3. Basu, Arnab K. & Chau, Nancy H., 1999. "Adverse selection, asymmetric information, and foreign investment policies," International Review of Economics & Finance, Elsevier, vol. 8(3), pages 239-252, September.
  4. William C. Gruben, 1992. "On the future erosion of the North American Free Trade Agreement," Research Paper 9208, Federal Reserve Bank of Dallas.
  5. Dani Rodrik, 1989. "Policy Uncertainty and Private Investment in Developing Countries," NBER Working Papers 2999, National Bureau of Economic Research, Inc.
  6. Feestra, R.C. & Lewis, T.R. & Mcmillan, J., 1989. "Designing Policies To Open Trade," Papers 349, California Davis - Institute of Governmental Affairs.
  7. Mehlum, Halvor, 2001. "Speed of adjustment and self-fulfilling failure of economic reform," Journal of International Economics, Elsevier, vol. 53(1), pages 149-167, February.
  8. Mehlum, Halvor, 2001. "Capital accumulation, unemployment, and self-fulfilling failure of economic reform," Journal of Development Economics, Elsevier, vol. 65(2), pages 291-306, August.
  9. Bernardes, Luis G., 2003. "Reference-dependent preferences and the speed of economic liberalization," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 32(5), pages 521-548, November.

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