Shock versus gradualism in models of rational expectations: the case of trade liberalization
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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- Calvo, Guillermo A., 1987. "On the costs of temporary policy," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 245-261, October.
- Michael Mussa, 1982. "Government Policy and the Adjustment Process," NBER Chapters, in: Import Competition and Response, pages 73-122 National Bureau of Economic Research, Inc.
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- Guillermo A. Calvo, 1988. "Costly Trade Liberalizations: Durable Goods and Capital Mobility," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 461-473, September.
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