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Shock Versus Gradualism in Models of Rational Expectations: The Case of Trade Liberalization

  • Leonardo Auernheimer
  • Susan Mary George

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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 97/122.

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Length: 20
Date of creation: 01 Sep 1997
Date of revision:
Handle: RePEc:imf:imfwpa:97/122
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  1. Maurice Obstfeld, 1984. "Capital Controls, The Dual Exchange Rate, and Devaluation," NBER Working Papers 1324, National Bureau of Economic Research, Inc.
  2. Calvo, Guillermo A., 1987. "On the costs of temporary policy," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 245-261, October.
  3. Guillermo A. Calvo, 1988. "Costly Trade Liberalizations: Durable Goods and Capital Mobility," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 461-473, September.
  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 141-48, February.
  5. 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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