Costly Trade Liberalizations: Durable Goods and Capital Mobility
The social costs of a temporary liberalization policy in the context of an economy with infinitely lived individuals and no intertemporal consumption substitution are studied. Importable goods, however, can be stored, and storability is the central source of distortions. Possible welfare costs of the induced inventory accumulation are shown to be significant. It is also argued that temporariness is formally equivalent to "lack of credibility." Because international capital mobility is the vehicle that magnifies these distortions, the results suggest that an optimal trade liberalization without full credibility could call for controls on international capital mobility.
Volume (Year): 35 (1988)
Issue (Month): 3 (September)
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