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

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  • Mr. Leonardo Auernheimer
  • Ms. Susan M George

Abstract

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.

Suggested Citation

  • Mr. Leonardo Auernheimer & Ms. Susan M George, 1997. "Shock Versus Gradualism in Models of Rational Expectations: The Case of Trade Liberalization," IMF Working Papers 1997/122, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1997/122
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    References listed on IDEAS

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    1. Obstfeld, Maurice, 1986. "Capital controls, the dual exchange rate, and devaluation," Journal of International Economics, Elsevier, vol. 20(1-2), pages 1-20, February.
    2. Calvo, Guillermo A., 1987. "On the costs of temporary policy," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 245-261, October.
    3. Guillermo A. Calvo, 1988. "Costly Trade Liberalizations: Durable Goods and Capital Mobility," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 461-473, September.
    4. Michael Mussa, 1982. "Government Policy and the Adjustment Process," NBER Chapters, in: Import Competition and Response, pages 73-122, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Bent, Peter H., 2020. "Recovery from financial crises in peripheral economies, 1870–1913," Explorations in Economic History, Elsevier, vol. 78(C).
    2. Mr. S. Nuri Erbas, 2002. "Primeron Reforms in a Second-Best Ambiguous Environment: A Case for Gradualism," IMF Working Papers 2002/050, International Monetary Fund.

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