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On the robustness of short run gains from trade reform

Rees, Lucy; Rod, Tyers

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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...[Show more]

dc.contributor.authorRees, Lucy
dc.contributor.authorRod, Tyers
dc.date.accessioned2004-11-22
dc.date.accessioned2005-03-10
dc.date.accessioned2011-01-05T08:33:21Z
dc.date.available2005-03-10
dc.date.available2011-01-05T08:33:21Z
dc.date.created2004
dc.identifier.urihttp://hdl.handle.net/1885/42594
dc.identifier.urihttp://digitalcollections.anu.edu.au/handle/1885/42594
dc.description.abstractThe 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, twosector, “almost small” open economy with asset markets and forward looking agents
dc.format.extent218721 bytes
dc.format.extent350 bytes
dc.format.mimetypeapplication/pdf
dc.format.mimetypeapplication/octet-stream
dc.language.isoen_AU
dc.subjecttrade reform
dc.subjectexchange rate regimes
dc.subjectfiscal policy
dc.titleOn the robustness of short run gains from trade reform
dc.typeWorking/Technical Paper
local.description.refereedno
local.identifier.citationmonthjun
local.identifier.citationyear2004
local.identifier.eprintid2849
local.rights.ispublishedno
dc.date.issued2004
local.contributor.affiliationCEPR, RSSS
local.contributor.affiliationANU
local.citationDiscussion Paper no.474
CollectionsANU Research Publications

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