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

Author/Editor:

Leonardo Auernheimer ; Susan M George

Publication Date:

September 1, 1997

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 97/122

Subject:

English

Publication Date:

September 1, 1997

ISBN/ISSN:

9781451854459/1018-5941

Stock No:

WPIEA1221997

Format:

Paper

Pages:

20

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