On the Robustness of Short Run Gains from Trade Reform

Lucy Rees and Rodney Tyers

No 331204, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: The long run gains from reductions in distortionary tariffs are robustly positive in neoclassical economies. In the short run, however, depending on the prevailing exchange rate and tax regimes, a combination of producer price deflation and nominal wage stickiness can cause trade liberalisation to be contractionary. Because trade liberalisation, taken alone, reduces the home prices of foreign goods, there is a substitution away from home produced goods and a real depreciation. Under the explicit and de facto fixed exchange rate regimes adopted by many developing countries this necessitates a contractionary producer price deflation. Under the floating exchange rate regimes of the larger industrialised economies, if lost tariff revenue is replaced via a consumption tax increase, contractionary producer price deflation can also occur. This paper examines the implications of these and other policy combinations for the short run gains from trade reform using a comparative static numerical model of a generic, two-sector, “almost small” open economy with asset markets and forward looking agents.

Keywords: International Relations/Trade; Research Methods/Statistical Methods (search for similar items in EconPapers)
Pages: 30
Date: 2004
References: Add references at CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/331204/files/1515.pdf (application/pdf)

Related works:
Working Paper: On the Robustness of Short Run Gains from Trade Reform (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:331204

Access Statistics for this paper

More papers in Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().