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Optimal Gradualism

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  • Nils Haakon Lehr
  • Pascual Restrepo

Abstract

This paper studies how gradualism affects the welfare gains from trade, technology, and reforms. When people face adjustment frictions, gradual shocks create less adverse distributional effects in the short run. We show that there are welfare gains from inducing a more gradual transition via temporary taxes on trade and technology, and provide formulas for the optimal path for taxes. Our formulas account for the possibility that reallocation effort responds to policy, and for the existence of income taxes and assistance programs. Using these formulas, we compute the optimal temporary taxes needed to mitigate the distributional consequences of rising import competition from China and the deployment of automation technologies substituting for routine jobs. Our formulas can also be used to compute the optimal timing of economic reforms or trade liberalizations, and we apply them to study Colombia’s trade liberalization in 1990—a prominent example where optimal policy called for a more gradual reform.

Suggested Citation

  • Nils Haakon Lehr & Pascual Restrepo, 2022. "Optimal Gradualism," NBER Working Papers 30755, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30755
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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