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Shock versus gradualism in models of rational expectations: the case of trade liberalization

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  • Auernheimer, Leonardo
  • George, Susan Mary

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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  • Auernheimer, Leonardo & George, Susan Mary, 1997. "Shock versus gradualism in models of rational expectations: the case of trade liberalization," Journal of Development Economics, Elsevier, vol. 54(2), pages 307-322, December.
    • Handle: RePEc:eee:deveco:v:54:y:1997:i:2:p:307-322
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    1. Obstfeld, Maurice, 1986. "Capital controls, the dual exchange rate, and devaluation," Journal of International Economics, Elsevier, vol. 20(1-2), pages 1-20, February.
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    3. Calvo, Guillermo A., 1987. "On the costs of temporary policy," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 245-261, October.
    4. Edwards, Sebastian & van Wijnbergen, Sweder, 1986. "The Welfare Effects of Trade and Capital Market Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 141-148, February.
    5. 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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    2. Mr. S. Nuri Erbas, 2002. "Primeron Reforms in a Second-Best Ambiguous Environment: A Case for Gradualism," IMF Working Papers 2002/050, International Monetary Fund.

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