Trade Reforms of Uncertain Duration and Real Uncertainty : A First Approximation

Author/Editor:

Guillermo Calvo ; Enrique G. Mendoza

Publication Date:

April 1, 1994

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 examines trade reforms of uncertain duration undertaken in economies subject to real foreign and domestic shocks. These reforms induce consumption and import booms regardless of whether they succeed or fail and of the degree of intertemporal elasticity of substitution. If tariff revenue is rebated, a recession follows the boom, but without rebates a boom or a recession may follow depending on the outcome of the reform. Consumption fluctuations reflect imperfect credibility and real shocks, and the credibility component depends on the mean and risk of real asset returns. Thus, observed booms are a noisy signal of imperfect credibility. Quantitatively, lack of credibility produces sizable consumption cycles, but generally smaller than those induced by real disturbances.

Series:

Working Paper No. 94/45

Subject:

Notes:

Also published in Staff Papers, Vol. 41, No. 4, December 1994.

English

Publication Date:

April 1, 1994

ISBN/ISSN:

9781451974270/1018-5941

Stock No:

WPIEA0451994

Format:

Paper

Pages:

42

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