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Trade Reforms of Uncertain Duration and Real Uncertainty: A First Approximation
Author:
Mr. Guillermo Calvo null

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Mr. Enrique G. Mendoza null

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Series:
IMF Working Papers
Volume/Issue:
Volume 1994: Issue 045
Language:
English
Publication Date:
01 Apr 1994
DOI:
https://doi.org/10.5089/9781451974270.001
ISBN:
9781451974270
ISSN:
1018-5941
Pages:
42
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
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund