Trade Reforms of Uncertain Duration and Real Uncertainty: A First Approximation

Guillermo Calvo and Enrique Mendoza

No 1994/045, IMF Working Papers from International Monetary Fund

Abstract: This paper examines trade reforms of uncertain duration undertaken in economies subject to real foreign and domestic shocks. These reforms induce consumption and import booms regardless of whether they succeed or fail and of the degree of intertemporal elasticity of substitution. If tariff revenue is rebated, a recession follows the boom, but without rebates a boom or a recession may follow depending on the outcome of the reform. Consumption fluctuations reflect imperfect credibility and real shocks, and the credibility component depends on the mean and risk of real asset returns. Thus, observed booms are a noisy signal of imperfect credibility. Quantitatively, lack of credibility produces sizable consumption cycles, but generally smaller than those induced by real disturbances.

Keywords: WP; business cycle; free trade; trade reform; terms-of-trade shock; consumption boom; tariff rebate; terms of trade improvement; savings plan; tariff-rebates economy; saving rate; productivity shock; consumption growth; Consumption; Tariffs; Terms of trade; Trade liberalization; Business cycles (search for similar items in EconPapers)
Pages: 42
Date: 1994-04-01
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Citations: View citations in EconPapers (15)

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Journal Article: Trade Reforms of Uncertain Duration and Real Uncertainty: A First Approximation (1994)
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