Shock Versus Gradualism in Models of Rational Expectations: The Case of Trade Liberalization
September 1, 1997
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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.
Subject: Commodities, Consumption, Foreign assets, Tariffs, Trade liberalization
Keywords: WP
Pages:
20
Volume:
1997
DOI:
Issue:
122
Series:
Working Paper No. 1997/122
Stock No:
WPIEA1221997
ISBN:
9781451854459
ISSN:
1018-5941
