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Trade Liberalization in Disinflation

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  • Dani Rodrik

Abstract

There exists near-consensus among professional economists on the desirability of achieving macroeconomic stabilization prior to the removal of microeconomic distortions. Yet this advice was completely disregarded in some of the most important cases of reform during the last decade--Bolivia and Mexico since 1985, Poland since 1990, Argentina since 1991, for example. In these and many other cases, radical trade liberalization measures were put in place, or existing programs speeded up, in conjunction with macroeconomic stabilization packages. In this paper I revisit this issue by focusing on recent liberalizations in Latin America. I argue that the theoretical case for the existence of a policy dilemma in exchange-rate management when trade liberalization is implemented simultaneously with stabilization policies is weaker than is usually presupposed. A commitment to a pegged exchange rate can, if credible, actually solve rather than intensify the potential conflict between trade liberalization and exchange-rate stability. However, the credibility of disinflation may be endangered by early liberalization.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4419.

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Date of creation: Aug 1993
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Publication status: published as P.B. Kenen (ed.), Understanding Interdependence: The Macroeconomics of the Open Economy, Princeton, NJ, Princeton University Press, 1995
Handle: RePEc:nbr:nberwo:4419

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  1. Pfeffermann, G.P. & Madarassy, A., 1992. "Trend in Private Investment in Developing Countries," Papers 14, World Bank - International Finance Corporation.
  2. R. Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," Working papers 347, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Mussa, Michael, 1987. "Macroeconomic Policy and Trade Liberalization: Some Guidelines," World Bank Research Observer, World Bank Group, vol. 2(1), pages 61-77, January.
  4. Pritchett, Lant & Sethi, Geeta, 1994. "Tariff Rates, Tariff Revenue, and Tariff Reform: Some New Facts," World Bank Economic Review, World Bank Group, vol. 8(1), pages 1-16, January.
  5. Dani Rodrik, 1992. "Foreign Trade in Eastern Europe's Transition: Early Results," NBER Working Papers 4064, National Bureau of Economic Research, Inc.
  6. Pfeffermann, G.P. & Madarassy, A., 1992. "Trends in Private Investment in Developing Countries," Papers 16, World Bank - International Finance Corporation.
  7. Bruno, M., 1991. "High Inflation and the Nominal Anchors of an Open Economy," Princeton Studies in International Economics 183, International Economics Section, Departement of Economics Princeton University,.
  8. de Melo, Jaime & Dhar, Sumana, 1992. "Lessons of trade liberalization in Latin America for economies in transition," Policy Research Working Paper Series 1040, The World Bank.
  9. Dani Rodrik, 1992. "The Rush to Free Trade in the Developing World: Why So Late? Why Now? Will it Last?," NBER Working Papers 3947, National Bureau of Economic Research, Inc.
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Cited by:
  1. Baffes, John & Elbadawi, Ibrahim A. & O'Connell, Stephen A., 1997. "Single-equation estimation of the equilibrium real exchange rate," Policy Research Working Paper Series 1800, The World Bank.
  2. Michael W. Klein & Nancy P. Marion, 1994. "Explaining the Duration of Exchange-Rate Pegs," NBER Working Papers 4651, National Bureau of Economic Research, Inc.

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