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Trade Liberalization in Disinflation

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  • Rodrik, Dani

Abstract

There exists near-consensus among professional economists on the desirability of achieving macroeconomic stabilization prior to the removal of microeconomic distortions. Yet this advice was completely disregarded in some of the most important cases of reform during the last decade -- Bolivia and Mexico since 1985, Poland since 1990, Argentina since 1991, for example. In these and many other cases, radical trade liberalization measures were put in place, or existing programmes speeded up, in conjunction with macroeconomic stabilization packages. In this paper I revisit this issue by focusing on recent liberalizations in Latin America. I argue that the theoretical case for the existence of a policy dilemma in exchange rate management when trade liberalization is implemented simultaneously with stabilization policies is weaker than is usually presupposed. A commitment to a pegged exchange rate can, if credible, actually solve rather than intensify the potential conflict between trade liberalization and exchange rate stability. The credibility of disinflation may be endangered by early liberalization, however.

Suggested Citation

  • Rodrik, Dani, 1993. "Trade Liberalization in Disinflation," CEPR Discussion Papers 832, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:832
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    References listed on IDEAS

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    1. Pritchett, Lant & Sethi, Geeta, 1994. "Tariff Rates, Tariff Revenue, and Tariff Reform: Some New Facts," The World Bank Economic Review, World Bank, vol. 8(1), pages 1-16, January.
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    4. Dani Rodrik, 1994. "Foreign Trade in Eastern Europe's Transition: Early Results," NBER Chapters, in: The Transition in Eastern Europe, Volume 2, Restructuring, pages 319-356, National Bureau of Economic Research, Inc.
    5. de Melo, Jaime & Dhar, Sumana, 1992. "Lessons of trade liberalization in Latin America for economies in transition," Policy Research Working Paper Series 1040, The World Bank.
    6. Bruno, M., 1991. "High Inflation and the Nominal Anchors of an Open Economy," Princeton Studies in International Economics 183, International Economics Section, Departement of Economics Princeton University,.
    7. Jeffrey D. Sachs, 1987. "Trade and Exchange Rate Policies in Growth-Oriented Adjustment Programs," NBER Working Papers 2226, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Klein, Michael W. & Marion, Nancy P., 1997. "Explaining the duration of exchange-rate pegs," Journal of Development Economics, Elsevier, vol. 54(2), pages 387-404, December.
    2. Baffes, John & Elbadawi, Ibrahim A. & O'Connell, Stephen A., 1997. "Single-equation estimation of the equilibrium real exchange rate," Policy Research Working Paper Series 1800, The World Bank.

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    More about this item

    Keywords

    Disinflation; Trade Policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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