## 5. Transitional Losses under Different Values of Omega: Fixed Versus Flexible Exchange Rates

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### Introduction and objective
- Integrate international trade models (flexible prices, long-run efficiency) with new open-economy macroeconomic models (nominal rigidities, short-run adjustment) to evaluate welfare effects of trade liberalization.
- Decompose welfare effect of tariff reduction into:
  - Steady-state effect (long-run efficiency gains).
  - Transitional effect (loss due to wage-price inertia slowing reallocation).
- Focus: a small developing economy financially integrated with the rest of the world; quantify transitional and steady-state effects under alternative monetary regimes:
  - Fixed exchange rates: St = S̄.
  - Flexible exchange rate with fixed price level: Pt = P̄.
  - Flexible price-level targeting via interest-rate rule: log(Rt/R) = δ log(Pt/P) (δ→∞ yields flexible regime with fixed price level).

### Theoretical framework — model features (key assumptions and mechanisms)
- Two-country, two-good (M and X) general equilibrium model with monopolistic competition, product differentiation, and sector-specific capital.
- Trade restrictions: import tariffs; tariff liberalization shock is unilateral reduction of home tariffs from 20 to 10 percent.
- International borrowing/lending via short-term foreign bond denominated in foreign currency; transaction cost increasing in foreign debt; transaction-cost function for net foreign assets is two-parameter exponential with φ1 and φ2 (implying 0 transaction cost when net foreign assets = 0).
- Nominal rigidities as quadratic adjustment costs:
  - Wage adjustment cost (proportion of wage income): AWt(l) = (1/2) Wω (Wl/W̄l − 1)^2.
  - Price adjustment cost (proportion of profits): ACh,Ph = Pω (Ph/Ph̄ − 1)^2 /2; Pω assumed same for both sectors.
- Monetary regimes and special cases:
  - Fixed exchange rate: St = S̄.
  - Flexible exchange rate with fixed price level: Pt = P̄.
  - Interest-rate rule: log(Rt/R) = δ log(Pt/P); δ→∞ corresponds to flexible with fixed price level.

### Calibration — baseline parameter values and steady-state normalizations
- Tariffs:
  - Home initial tariffs = 20 percent; foreign tariffs = 10 percent (i.e., τM = τX = 0.2, τ*M = τ*X = 0.1 in baseline).
  - Tariff liberalization: home tariffs ↓ from 20 to 10 percent (both M and X).
- Shares and normalizations:
  - χM = χX = 0.5.
  - Imports (equals exports) = 0.25 of aggregate expenditures.
  - Imports of M = 80 percent of total imports; exports of X = 80 percent of total exports.
  - Labor share /WL PC = 0.6.
  - Consumption and wage rate normalized to 1; all price indexes normalized to 1.
  - Implied χ values: MX χ = 0.5; MFMH χχ = 0.4, 0.6; XF χ = 0.1; XH χ = 0.9.
- Preference and technology parameters:
  - Discount factor β = 0.99.
  - Intertemporal elasticity of substitution = 1/ρ = 0.5 (ρ chosen accordingly).
  - Elasticity of labor supply = 1/μ = 0.25 (μ chosen accordingly).
  - Substitution elasticity between traded goods η = 3.0.
  - Elasticity between home and foreign bundles θM = θX = 6.0 (baseline); foreign-market elasticities θ = 12.0.
  - Elasticities among varieties εM = εX = 8.0 (baseline).
  - Labor-services substitution elasticity Lε = 8.0.
  - Labor–capital substitution σ = 0.9.
  - Labor intensity: XM αα = 1.25.
- Adjustment cost and transaction-cost parameters:
  - Wω = Pω = 800 (baseline).
  - Transaction-cost parameters: φ1 = φ2 = 0.01.

### Macroeconomic adjustment: dynamic responses (baseline)
- Tariff cut: home tariffs reduced by 10 percentage points (from 0.2 to 0.1).
- Sticky wages/prices (baseline Wω = Pω = 800) versus fully flexible wages/prices (Wω = Pω = 0).
- Under sticky wages/prices and fixed exchange rates:
  - Relative price of foreign varieties falls → demand shifts to imported goods → initial decline in output and employment.
  - Consumption decreases less than output (consumption smoothing) → temporary current account deterioration (deficit).
- Under sticky wages/prices and flexible exchange rates:
  - Home-currency depreciation stimulates foreign demand for domestic goods → initial increase in output and employment (exchange rate overshoots).
  - Consumption increases less than output → current account surplus.
- Fully flexible wages/prices:
  - No transitional dynamics; variables jump to new steady-state in same period.
- Interest-rate dynamics:
  - Under fixed exchange rates, interest rate unchanged; price level falls gradually.
  - Under flexible exchange rates with fixed price level, exchange rate jumps and interest rate falls sharply (interest rate simulation falls to a level very close to zero; infeasible extreme would require fall of about 80 percentage points if price level cannot change).

### Welfare measurement and decomposition
- Welfare metric: equivalent-variation γ (fraction of initial steady-state consumption making households indifferent between initial and new state).
- Decomposition: γ = γTR + γSS, where:
  - γSS = steady-state welfare gain.
  - γTR = transitional welfare loss (computed residually).
- Fully flexible wages/prices imply γTR = 0 and γ = γSS.

### Quantitative welfare results (baseline and variations)
- Baseline results (γ multiplied by 100 in reported table; figures are percent of initial steady-state consumption):
  - Steady-state welfare gain from lowering tariffs by 10 percentage points: about 0.4 percent.
  - Table values (percent of steady-state consumption):
    - Baseline Model:
      - Total Effect (percent): 0.32972 (Fixed ER), 0.34061 (Flexible ER)
      - Transitional Effect (percent): -0.04672 (Fixed ER), -0.03583 (Flexible ER)
      - Steady-State Effect (percent): 0.37643
    - Variation 1:
      - Total Effect (percent): 0.40156 (Fixed ER), 0.44428 (Flexible ER)
      - Transitional Effect (percent): -0.05909 (Fixed ER), -0.01637 (Flexible ER)
      - Steady-State Effect (percent): 0.46065
    - Variation 2:
      - Total Effect (percent): 0.30710 (Fixed ER), 0.32511 (Flexible ER)
      - Transitional Effect (percent): -0.04137 (Fixed ER), -0.02335 (Flexible ER)
      - Steady-State Effect (percent): 0.34847
- Interpreted magnitudes:
  - Transitional loss larger under fixed than flexible exchange rates, but small in magnitude for baseline: under fixed exchange rates transitional loss ≈ 12.5 percent of the steady-state gain (i.e., about 12.5 percent of 0.4 percent).
  - Variation 1 (greater competitiveness: θM = θX = 9, εM = εX = 11):
    - Higher steady-state gains.
    - Transitional loss decreases for flexible ER but increases for fixed ER.
  - Variation 2 (asymmetric competition: θM = 4, θX = 9, εM = 6, εX = 11):
    - Small changes to steady-state and transitional effects relative to baseline.

### Flexible price-level targeting and closed-economy cases
- Flexible price-level targeting (interest-rate rule log(Rt/R) = δ log(Pt/P)):
  - Transitional loss falls as δ decreases; nearly eliminated when δ is very small.
  - A weak interest-rate response (small δ) can approximate flexible wage-price equilibrium and entail little or no macroeconomic adjustment cost.
  - Example: δ = 0.75 keeps interest rate above zero and transitional losses under this policy would be close to zero.
- Financially closed economy (no international capital mobility):
  - Steady-state gain same as with capital mobility (net foreign assets = 0 steady state).
  - Transitional effect much larger under fixed exchange rates if current account must be balanced each period:
    - Baseline simulation: tariff cut by 10 percentage points causes transitional loss = 0.26855 percent of GDP, about 70 percent of the steady-state gain reported in Table 2.
  - Allowing price-level adjustment (flexible ER) or weak interest-rate response (δ = 0.75) can limit or nearly eliminate transitional losses even without capital mobility.

### Sensitivity analysis — robustness
- Parameter ranges examined:
  - ρ and μ varied from 2 to 5; Lε varied from 6 to 11.
  - Wω and Pω varied together from 200 to 1400; also cases with prices more/less sticky than wages.
- Main results:
  - Steady-state welfare measure largely insensitive to reasonable parameter variations.
  - Transitional loss under fixed exchange rates generally remains within 10 to 15 percent of the steady-state gain across parameter variations.
  - Transitional loss under flexible exchange rates generally smaller but more dispersed across parameter variations.
  - Higher wage-price inertia (larger Wω, Pω) increases transitional losses for both regimes; flexible ER still yields smaller transitional losses than fixed ER, though the gap narrows as stickiness increases.
  - Flexible price-level targeting outcomes are not very sensitive to parameter variations; decreasing δ reduces transitional loss across variations.

### Policy implications and conclusions
- For a financially integrated small developing economy, short-run costs of tariff reduction are generally:
  - Larger under fixed exchange rates than under flexible exchange rates for plausible parameter values.
  - Small relative to long-run efficiency gains: fixed exchange rate transitional loss about 10–15 percent of the steady-state gain in many parameterizations.
- Appropriate monetary policy can largely eliminate transitional losses:
  - A flexible price-level targeting rule with a weak interest-rate response (small δ) can closely duplicate flexible wage-price equilibrium and virtually remove transitional loss.
- For financially closed economies, fixed exchange rates can generate substantial transitional losses that may offset a large fraction of steady-state gains; alternative monetary regimes that permit price-level adjustment can avoid these large losses.
- Model limitations and extensions:
  - Simple two-sector framework; results likely extend to higher-dimension models with more sectors, nontraded goods, and intermediate inputs.
  - Endogenizing capital via investment is recommended as a significant extension for future research.

### Key numeric axes and figure notes (selected)
- Figure 1 (real variables): Output axis ticks: 0.8,0.9,1,1.1,1.2; Employment ticks: 0.4,0.5,0.6,0.7,0.8; Consumption ticks: 0.95,1,1.05,1.1; Current Account ticks: -0.2,-0.1,0,0.1,0.2 (periods 1–20). Series: No Rigidities, Flexible ER, Fixed ER.
- Figure 2 (nominal variables): Exchange Rate ticks: 0.8,0.85,0.9,0.95,1; Price Level ticks: 0.9,0.95,1,1.05,1.1; Interest Rate ticks: 0,0.005,0.01,0.015,0.02 (periods 1–20).
- Figure 3 (Delta): Horizontal axis Delta = 0–12; Transitional loss ticks: 0,0.005,0.01,0.015,0.02,0.025,0.03,0.035.
- Figure 4 (Loss-Ratio distributions): Horizontal axis Loss Ratio (%) ticks include 0,0.1,0.2,0.3 and 0,2,4,6,8,10,12,14,16; Vertical axis ticks: 0,0.1,0.2,0.3.
- Figure 5 (Omega): Omega equals both P ω and W ω. Horizontal axis markers include 0,0.01,0.02,0.03,0.04,0.05,0.06,0.07,0.08 and integer-like markers 0 200 4006008001000120014001600. Vertical axis: Transitional loss as percentage of the steady-state gain.

*Source: IMF Working Paper — Section 5, "_wp06304 - 5.   Transitional Losses under Different Values of Omega: Fixed Versus Flexible Exchange Rates"_*

### References.................................................................................................20

### _wp06304 - References.................................................................................................20

### Tables
- 1.   Baseline Model: Parameter Values and Normalizations........................................22
- 2.   Welfare Effects of Trade Liberalization...........................................................22

### Figures
- 1.   Dynamic Response of Real Variables to Trade Liberalization.......................... ......23
- 2.   Dynamic Response of Nominal Variables to Trade Liberalization........................ ....24
- 3.   Transitional Losses under Different Values of Delta............................................25
- 4.   Distribution of Loss-Ratio Estimates under Fixed and Flexible Exchange Rates.......... 25

*Source: _wp06304 - References.................................................................................................20*

### 5.   Transitional Losses under Different Values of Omega: Fixed Versus Flexible

### 5.   Transitional Losses under Different Values of Omega: Fixed Versus Flexible Exchange Rates

### Introduction and objective
- Integrate international trade models (flexible prices, long-run efficiency) with new open-economy macroeconomic models (nominal rigidities, short-run adjustment) to evaluate welfare effects of trade liberalization.
- Decompose welfare effect of tariff reduction into:
  - Steady-state effect (long-run efficiency gains).
  - Transitional effect (loss due to wage-price inertia slowing reallocation).
- Focus: a small developing economy financially integrated with the rest of the world; quantify transitional and steady-state effects under alternative monetary regimes (fixed exchange rates, flexible exchange rates with fixed price level, and flexible price-level targeting via interest-rate rule).

### Theoretical framework — model features (key assumptions and mechanisms)
- Two-country, two-good (M and X) general equilibrium model with monopolistic competition, product differentiation, and sector-specific capital.
- Trade restrictions: import tariffs.
- International borrowing/lending via short-term foreign bond denominated in foreign currency; transaction cost increasing in foreign debt.
- Nominal rigidities introduced as quadratic adjustment costs for wages and prices:
  - Wage adjustment cost (proportion of wage income): AWt(l) = (1/2) Wω (Wl/W̄l − 1)^2 (equation (20)).
  - Price adjustment cost (proportion of profits): ACh,Ph = Pω (Ph/Ph̄ − 1)^2 /2 (equation (24)); Pω assumed same for both sectors.
- Monetary regimes:
  - Fixed exchange rate: St = S̄ (equation (38)).
  - Flexible exchange rate with fixed price level: Pt = P̄ (equation (39)).
  - Flexible price-level targeting (interest-rate rule): log(Rt/R) = δ log(Pt/P) (equation (40)); δ→∞ yields flexible regime with fixed price level.
- Transaction cost function for net foreign assets: a two-parameter exponential form with φ1 and φ2 (equation (36)), implying 0 transaction cost when net foreign assets = 0.

### Calibration — baseline parameter values and steady-state normalizations
- Tariffs: home initial tariffs = 20 percent; foreign tariffs = 10 percent (i.e., τM = τX = 0.2, τ*M = τ*X = 0.1 in baseline).
- Tariff liberalization shock: unilateral reduction of home tariffs from 20 to 10 percent (both M and X).
- Shares and normalizations:
  - Both goods equal share in aggregate consumption: χM = χX = 0.5.
  - Imports (equals exports) account for a quarter of aggregate expenditures: 0.25.
  - Imports of M assumed 80 percent of total imports; exports of X assumed 80 percent of total exports.
  - Labor share /WL PC = 0.6.
  - Normalized initial steady-state values: consumption and wage rate = 1; all price indexes normalized to 1.
  - Implied χ values: MX χ = 0.5; MFMH χχ = 0.4, 0.6; XF χ = 0.1; XH χ = 0.9 (as per calibration implications).
- Preference and technology parameters:
  - Discount factor β = 0.99 (quarterly; implies annualized real rate ≈ 4 percent).
  - Intertemporal elasticity of substitution = 1/ρ = 0.5 → ρ chosen accordingly.
  - Elasticity of labor supply = 1/μ = 0.25 → μ chosen accordingly.
  - Substitution elasticity between traded goods η = 3.0.
  - Elasticity between home and foreign bundles θM = θX = 6.0 (baseline); foreign-market elasticities **θ** (**) set to 12.0.
  - Elasticities among varieties εM = εX = 8.0 (baseline); mark-up a little less than 15 percent implied.
  - Labor-services substitution elasticity Lε = 8.0 (baseline).
  - Labor–capital substitution σ = 0.9.
  - Labor intensity: XM αα = 1.25 (good X labor intensive); parameters chosen so ML and XL consistent with L = 0.6.
- Adjustment cost and transaction-cost parameters:
  - Wage and price adjustment cost parameters: Wω = Pω = 800 (baseline).
  - Transaction-cost function parameters: φ1 = φ2 = 0.01 (very slow convergence to zero net foreign assets).

### Macroeconomic adjustment: dynamic responses (baseline)
- Tariff cut: home tariffs reduced by 10 percentage points (from 0.2 to 0.1).
- Cases considered: sticky wages/prices (baseline) versus fully flexible wages/prices (set Wω = Pω = 0).
- Under sticky wages/prices and fixed exchange rates:
  - Tariff cut lowers relative price of foreign varieties → shift demand to imported goods → initial decline in output and employment.
  - Consumption decreases less than output (consumption smoothing) → temporary current account deterioration (deficit).
- Under sticky wages/prices and flexible exchange rates:
  - Home-currency depreciation stimulates foreign demand for domestic goods → initial increase in output and employment (exchange rate overshoots).
  - Consumption increases less than output → current account surplus.
- Under fully flexible wages/prices (no nominal rigidities):
  - No transitional dynamics; variables jump to new steady-state in same period.
- Interest-rate dynamics:
  - Under fixed exchange rates, interest rate unchanged; price level falls gradually.
  - Under flexible exchange rates with fixed price level, price level held constant; exchange rate jumps and interest rate falls sharply (interest rate falls to a level very close to zero in simulation; in infeasible extreme, would need to fall about 80 percentage points if price level cannot change).

### Welfare measurement and decomposition
- Welfare measured by equivalent-variation γ (fraction of initial steady-state consumption making households indifferent between initial and new state, eq. (41)).
- Decomposition: γ = γTR + γSS (equation (42)), where:
  - γSS = steady-state welfare gain (long-run).
  - γTR = transitional welfare loss (adjustment cost), computed residually.
- If wages and prices fully flexible, γTR = 0 and γ = γSS.

### Quantitative welfare results (baseline and variations)
- Baseline results (welfare indexes expressed in percentage terms; γ multiplied by 100 in reported table):
  - Steady-state welfare gain from lowering tariffs by 10 percentage points: about 0.4 percent of initial steady-state consumption.
  - Transitional loss: larger under fixed than flexible exchange rates, but small in magnitude:
    - Under fixed exchange rates, transitional loss ≈ 12.5 percent of the steady-state gain (i.e., about 12.5 percent of 0.4 percent).
    - Conclusion: macroeconomic adjustment makes only a small difference to total welfare effect for baseline calibration.
- Variation 1 (greater competitiveness): θM = θX = 9, εM = εX = 11.
  - Higher steady-state gains.
  - Transitional loss decreases for flexible exchange rates but increases for fixed exchange rates.
- Variation 2 (asymmetric competition): M less competitive, X more competitive: θM = 4, θX = 9, εM = 6, εX = 11.
  - Small changes to steady-state and transitional effects relative to baseline.
- Flexible price-level targeting (interest-rate rule, equation (40)):
  - Transitional loss falls as δ decreases; nearly eliminated when δ is very small.
  - A sufficiently weak interest-rate response (small δ) can approximate flexible wage-price equilibrium and entail little or no macroeconomic adjustment cost.
  - Example: an interest-rate rule with δ = 0.75 would keep the interest rate above zero and transitional losses under this policy would be close to zero.
- No international capital mobility (financially closed economy):
  - Steady-state gain same as with capital mobility (net foreign assets = 0 steady state).
  - Transitional effect much larger under fixed exchange rates if current account must be balanced each period (no international borrowing):
    - Baseline simulation: tariff cut by 10 percentage points causes transitional loss = 0.26855 percent of GDP, about 70 percent of the steady-state gain reported in Table 2.
  - Alternative monetary policies can limit losses even without capital mobility:
    - Flexible exchange rate with falling price level (i.e., allowing price-level adjustment) implementable can save transitional losses.
    - Interest-rate rule with δ = 0.75 sufficient to keep interest rate positive and transitional loss close to zero.

### Sensitivity analysis — robustness
- Variation ranges studied:
  - ρ and μ varied from 2 to 5; Lε varied from 6 to 11.
  - Adjustment cost parameters Wω and Pω varied together from 200 to 1400; also explored cases with prices more/less sticky than wages.
- Main findings from sensitivity checks:
  - Steady-state welfare measure largely insensitive to reasonable parameter variations.
  - Transitional loss under fixed exchange rates generally remains within 10 to 15 percent of the steady-state gain across parameter variations.
  - Transitional loss under flexible exchange rates is generally smaller but more dispersed across parameter variations.
  - Higher wage-price inertia (larger Wω, Pω) increases transitional losses for both regimes; flexible exchange rates still generate smaller transitional losses than fixed exchange rates, though the gap narrows as stickiness increases.
  - Flexible price-level targeting results are not very sensitive to parameter variations; decreasing δ reduces transitional loss across variations.

### Policy implications and conclusions
- For a financially integrated small developing economy, short-run costs of tariff reduction are generally:
  - Larger under fixed exchange rates than under flexible exchange rates for plausible parameter values.
  - Small relative to long-run efficiency gains: fixed exchange rate transitional loss about 10–15 percent of steady-state gain in many parameterizations.
- Appropriate monetary policy can largely eliminate transitional losses:
  - A flexible price-level targeting rule with a weak interest-rate response (small δ) can closely duplicate flexible wage-price equilibrium and virtually remove transitional loss.
- For financially closed economies, fixed exchange rates can generate substantial transitional losses that may offset a large fraction of steady-state gains; alternative monetary regimes that permit price-level adjustment can avoid these large losses.
- Model limitations and extensions:
  - Model is a simple two-sector framework; results likely extend to higher-dimension models with more sectors, nontraded goods, and intermediate inputs.
  - Endogenizing capital via investment would be a significant extension and could affect macroeconomic adjustment costs — recommended as a topic for future research.

*Source: IMF Working Paper — Section 5, "_wp06304 - 5.   Transitional Losses under Different Values of Omega: Fixed Versus Flexible_"*

### REFERENCES

### _wp06304 - REFERENCES

### References
- Anderson, Kym, and Will Martin, 2006, “Agriculture, Trade Reform, and the Doha Agenda,” Agricultural Trade Reform and the Doha Agenda (Washington: World Bank).
- Bayoumi, Tamim, Douglas Laxton, and Paolo Pesenti, 2004, “Benefits and Spillovers of Greater Competition in Europe: A Macroeconomic Assessment,” NBER Working Paper No. 10416 (Cambridge, Massachusetts: National Bureau of Economic Research).
- Boyer, R. S., 1977, “Commercial Policy under Alternative Exchange Rate Regimes,” The Canadian Journal of Economics, Vol. 10, No. 2, pp. 218–232.
- Chacholiades, Miltiades, 1978, International Monetary Theory and Policy (New York: McGraw Hill).
- Chari, V. V., Patrick J. Kehoe, and Ellen R. McGrattan, 2002, “Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?” Review of Economic Studies, Vol. 69, No. 3, pp. 533–63.
- Dornbusch, Rudiger, 1976, “Expectations and Exchange Rate Dynamics,” Journal of Political Economy, Vol. 84, No. 6, pp. 1161–76.
- Dornbusch, Rudiger, 1980, Open Economy Macroeconomics (New York: Basic Books).
- Hertel, Thomas, David Hummels, Maros Ivanic, and Roman Keeney, 2004, “How Confident Can We Be in CGE-Based Assessments of Free Trade Agreements?” GTAP Working Paper No. 26 (March).
- Husain, Aasim, Aska Mody, and Kenneth S. Rogoff, 2004, “Exchange Rate Regime Durability and Performance in Developing Versus Advanced Countries,” NBER Working Paper No. 10673 (Cambridge, Massachusetts: National Bureau of Economic Research).
- Jomini, Patrick, J.F. Zeitsch, R. McDougall, A. Welsh, S. Brown, J. Hambley, and J. Kelly, 1991, SALTER: A General Equilibrium Model of the World Economy, Vol. 1, Model Structure, Database, and Parameters (Canberra: Productivity Commission).
- Krugman, Paul, 1982, “The Macroeconomics of Protection with a Floating Exchange Rate,” Carnegie-Rochester Series on Public Policy, 16, pp. 141–82.
- Laxton, Douglas, and Paolo Pesenti, 2003, “Monetary Rules for Small, Open, Emerging Economies,” Journal of Monetary Economics, Vol. 50, pp. 1109–46.
- Martins, J., S. Scarpetta, and D. Pilat, 1996, “Mark-up Pricing, Market Structure and the Business Cycle,” OECD Economic Studies, No. 27, pp. 71–106.
- Mundell, Robert, 1961, “Flexible Exchange Rates and Employment Policy,” The Canadian Journal of Economics and Political Science, No. 27 (November), pp. 509–17.
- Obstfeld, Maurice, 2004, “Globalization, Macroeconomic Performance and the Exchange Rates of Emerging Economies,” NBER Working Paper No. 10849 (Cambridge, Massachusetts: National Bureau of Economic Research).
- Razin, A., and L.E.O. Svensson, 1983, “Trade Taxes and the Current Account,” Economics Letters, Vol. 13, No. 1, pp. 55–57.

### Baseline Model: Parameter Values and Normalizations
- Shares: MXMFMHXFXH χ χ χ χ χ χ == = = = = = 0.5,0.4,0.6,0.1,0.9
- Utility Parameters: ρ μ ψ ===, 2.0,4.0,6.75, 1.0 /1.01 β =
- Elasticities of Substitution: MXMXL η θ θ ε ε ε === === 3.0,6.0,8.0
- MX θ θ == ** 12.0
- Technology Parameters: MX σ α α === .9,.61,.76
- Adjustment and Transaction Costs: PW ω ω φ φ ==== 12 800,0.01
- Initial Steady-State Values:
  - MXMX τ τ τ τ ==== .2,.1, 1C=, .6L=,.833,S=
  - W P P P P P ==== 1, MXMHMFXHXF P P P P P = = = = =
  - MXMFXF P P P P ==== 1 ** *

(Note: notation and alignment preserved as in source.)

### Welfare Effects of Trade Liberalization (in percent of steady-state consumption before trade liberalization)
- Table columns preserved as labeled: Total Effect (percent), Transitional Effect (percent), Steady-State Effect (percent); scenarios include Fixed ER and Flexible ER.
- Baseline Model:
  - Total Effect (percent): 0.32972 (Fixed ER), 0.34061 (Flexible ER)
  - Transitional Effect (percent): -0.04672 (Fixed ER), -0.03583 (Flexible ER)
  - Steady-State Effect (percent): 0.37643
- Variation 1:
  - Total Effect (percent): 0.40156 (Fixed ER), 0.44428 (Flexible ER)
  - Transitional Effect (percent): -0.05909 (Fixed ER), -0.01637 (Flexible ER)
  - Steady-State Effect (percent): 0.46065
- Variation 2:
  - Total Effect (percent): 0.30710 (Fixed ER), 0.32511 (Flexible ER)
  - Transitional Effect (percent): -0.04137 (Fixed ER), -0.02335 (Flexible ER)
  - Steady-State Effect (percent): 0.34847
- Note: 9,11 for variation 1, and 4,9,6,11 for varition 2 MXMXMXMX θ θ ε ε θ θ ε ε == === = = =

### Figures and Dynamic Responses — Key Numeric Axes and Notes
- Figure 1. Dynamic Response of Real Variables to Trade Liberalization
  - Output axis ticks: 0.8,0.9,1,1.1,1.2 across periods 1–20 (labels show 1 through 20)
  - Employment axis ticks: 0.4,0.5,0.6,0.7,0.8 across periods 1–20
  - Consumption axis ticks: 0.95,1,1.05,1.1 across periods 1–20
  - Current Account axis ticks: -0.2,-0.1,0,0.1,0.2 across periods 1–20
  - Series shown: No Rigidities, Flexible ER, Fixed ER
- Figure 2. Dynamic Response of Nominal Variables to Trade Liberalization
  - Exchange Rate axis ticks: 0.8,0.85,0.9,0.95,1 across periods 1–20 (Flexible ER vs Fixed ER)
  - Price Level axis ticks: 0.9,0.95,1,1.05,1.1 across periods 1–20 (Flexible ER vs Fixed ER)
  - Interest Rate axis ticks: 0,0.005,0.01,0.015,0.02 across periods 1–20 (Flexible ER vs Fixed ER)
- Figure 3. Transitional Losses under Different Values of Delta
  - Horizontal axis (Delta) plotted over integer values 0–12
  - Vertical axis/transitional loss ticks: 0,0.005,0.01,0.015,0.02,0.025,0.03,0.035
- Figure 4. Distribution of Loss-Ratio Estimates under Fixed and Flexible Exchange Rates
  - Horizontal axis: Loss Ratio (%) ticks include 0,0.1,0.2,0.3 and integer ticks 0,2,4,6,8,10,12,14,16
  - Vertical axis: 0,0.1,0.2,0.3
  - Note: On the horizontal axis, the loss ratio represents the transitional loss as a percentage of steady-state gain; vertical axis measures frequency. Kernel density estimates of the implied distributions (or PDFs) are drawn between minimum and maximum loss-ratio estimates obtained.
- Figure 5. Transitional Losses under Different Values of Omega: Fixed Versus Flexible Exchange Rates
  - Note: Omega equals both P ω and W ω. The vertical axis measures the transitional loss as a percentage of the steady-state gain.
  - Horizontal axis (Omega) numeric markers shown: 0,0.01,0.02,0.03,0.04,0.05,0.06,0.07,0.08 and integer-like markers 0 200 4006008001000120014001600
  - Vertical axis label: Transitional loss (Flexible vs Fixed)

*Source: _wp06304 - REFERENCES (extracted content unit).*

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