Credibility, Real Interest Rates, and the Optimal Speed of Trade Liberalization
This paper investigates the effects of imperfectly credible trade liberalization programs on welfare and the allocation of real resources. We present a rational expectations model in which a government, with limited access to international financial markets may be forced to abort a liberalization program if hard-currency reserves are depleted too quickly. The liberalization's lack of perfect credibility arts as a distortion which becomes (rationally) intensified under the typical first-best policy of a direct move to free trade. A gradual lowering of trade barriers turns out to he welfare-superior to an immediate liberalization, and to improve the chance that. the program will ultimately succeed. We then derive the optimal speed of liberalization, the intertemporal allocation of resources, and the liberalization program's credibility.
|Date of creation:||Aug 1987|
|Date of revision:|
|Publication status:||published as Journal of International Economics, Vol. 25, pp. 71-93, (1988).|
|Note:||ITI ME IFM|
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UCLA Economics Working Papers
313, UCLA Department of Economics.
- Sebastian Edwards & Sweder van Wijnbergen, 1983. "The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios," NBER Working Papers 1245, National Bureau of Economic Research, Inc.
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