On the costs of temporary policy

Abstract

The effects and costs of a temporary trade liberalization experiment are studied in terms of a model with an infinitely-lived individual, under perfect capital mobility and no static gains from trade. It is shown that the current account deteriorates during liberalization, and becomes more negative, the shorter is the liberalization period. The costs are non-monotonic with respect to the latter, and timing of their maximum varies widely with parameters. The analysis is extended to include durable and home goods, money, and static gains from trade.