Trade Liberalization, Macroeconomic Adjustment, and Welfare: Unifying Trade and Macro Models
IMF Working Papers, December 1, 2006
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Bibliographic details
- Authors: Ehsan U. Choudhri, Hamid Faruqee, Stephen Tokarick
- Published: December 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451865646.001
Overview
- Authors: Ehsan U. Choudhri, Hamid Faruqee, Stephen Tokarick
- Date: December 1, 2006
- Core question: Quantify long-run welfare gains from trade liberalization versus short-run macroeconomic adjustment costs within a dynamic general equilibrium framework that integrates elements of international trade and macroeconomic models.
- Decomposition: Welfare effect = steady-state efficiency gain + transitional loss associated with wage-price stickiness.
- Key qualitative result: The transitional loss is small relative to the steady-state gain.
Methodology
- Framework: Dynamic general equilibrium model that captures key elements of both international trade and macroeconomic models.
- Frictions considered: Wage-price stickiness driving transitional macroeconomic losses following trade liberalization.
- Exchange rate regimes analyzed: Flexible exchange rates and fixed exchange rates.
- Policy rule evaluated: Flexible price-level targeting.
Key Findings
- Transitional loss magnitude:
- Described as "small relative to the steady-state gain."
- Exchange rate regime comparison:
- The transitional loss "tends to be lower under flexible as compared to fixed exchange rates."
- Policy rule effect:
- The transitional loss "can be reduced further by a flexible price-level targeting policy rule."
Policy Implications and Recommendations
- Exchange rate flexibility:
- Flexible exchange rates are associated with lower transitional welfare losses following trade liberalization compared with fixed exchange rates.
- Monetary policy design:
- Implementing a flexible price-level targeting policy rule can further reduce transitional losses from trade liberalization.
- Trade liberalization assessment:
- Evaluate policy reforms accounting for both steady-state efficiency gains and transitional macroeconomic adjustment costs driven by wage-price stickiness.