The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Ehsan Choudhri, Hamid Faruqee, and Stephen Tokarick
INTERNATIONAL MONETARY FUND
Trade liberalization leads to long-run gains, but it can also involve costly short-run macroeconomic adjustment. The paper explores the relative importance of these effects within a dynamic general equilibrium model that captures key elements of both international trade and macroeconomic models. The welfare effect of trade liberalization is decomposed into a steady-state efficiency gain and a transitional loss associated with wage-price stickiness. Our estimates show that the transitional loss is small relative to the steady-state gain, and tends to be lower under flexible as compared to fixed exchange rates. We also show that the loss can be reduced further by a flexible price-level targeting policy rule.