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Trade Reforms of Uncertain Duration and Real Uncertainty: A First Approximation

  • Guillermo A. Calvo

    (International Monetary Fund)

  • Enrique G. Mendoza

    (International Monetary Fund)

This paper examines trade reforms of uncertain duration in economies affected by real shocks. These reforms induce consumption booms regardless of their duration and of the degree of intertemporal substitution. A recession may follow the boom, depending on the outcome of the reform and on whether government transfers offset wealth effects of tariffs. Observed booms in reforming economies are a noisy indicator of credibility because they reflect both policy uncertainty and real shocks, and the credibility component is determined in part by the properties of real shocks. Lack of credibility produces generally smaller fluctuations than those induced by real disturbances.

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Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 41 (1994)
Issue (Month): 4 (December)
Pages: 555-586

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Handle: RePEc:pal:imfstp:v:41:y:1994:i:4:p:555-586
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  1. Reinhart, Carmen & Vegh, Carlos, 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," MPRA Paper 13898, University Library of Munich, Germany.
  2. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate: Theory and evidence," MPRA Paper 13412, University Library of Munich, Germany.
  3. van Wijnbergen, Sweder, 1990. "Trade Reform, Policy Uncertainty and the Current Account : A Non-Expected Utility Approach," CEPR Discussion Papers 441, C.E.P.R. Discussion Papers.
  4. Jonathan David Ostry & Carmen Reinhart, 1991. "Private Saving and Terms of Trade Shocks; Evidence From Developing Countries," IMF Working Papers 91/100, International Monetary Fund.
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