MACROECONOMIC POLICY AND TRADE LIBERALIZATION: SOME GUIDELINES

Abstract

Appropriate conduct of macroeconomic policy can play a crucial role in the success of trade liberalization. At a given nominal exchange rate, a trade liberalization that significantly reduces tariffs and quantitative restrictions on imports normally implies a reduction in the general level of domestic prices and wages, especially in the import competing sector. To diminish recessionary effects of domestic price and wage deflation, it is often appropriate to devaluate a country's currency in conjunction with a major trade liberalization. Monetary policy needs to be consistent with exchange rate policy, avoiding both restrictiveness that might induce recession and excessive ease that would fuel inflation and force future devaluations. Since trade liberalization can induce a short-run deterioration of the government's budget position, fiscal policy needs to remain restrained in order to limit the dangers posed by large government deficits. Wage policy should be directed toward facilitating adjustments in relative wage rates and credit policy should assume that adequate credit is available to finance expansion. Finally, government policy should avoid large balance of payments deficits.