Trade Liberalization, Macroeconomic Adjustment, and Welfare: Unifying Trade and Macro Models

28 Pages Posted: 25 Jan 2007

See all articles by Hamid Faruqee

Hamid Faruqee

International Monetary Fund (IMF) - Research Department

Stephen Tokarick

International Monetary Fund (IMF)

Ehsan U. Choudhri

Carleton University - Department of Economics

Date Written: Janurary 2007

Abstract

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.

JEL Classification: F12, F13, F41

Suggested Citation

Faruqee, Hamid and Tokarick, Stephen and Choudhri, Ehsan U., Trade Liberalization, Macroeconomic Adjustment, and Welfare: Unifying Trade and Macro Models (Janurary 2007). IMF Working Paper No. 06/304, Available at SSRN: https://ssrn.com/abstract=959301

Hamid Faruqee (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Stephen Tokarick

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Ehsan U. Choudhri

Carleton University - Department of Economics ( email )

1125 Colonel By Drive
Ottawa, Ontario
Canada

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