Trade Reforms of Uncertain Duration and Real Uncertainty: A First Approximation

Abstract

This paper examines trade reforms of uncertain duration in economies affected by real shocks. These reforms induce consumption booms regardless of their duration and of the degree of intertemporal substitution. A recession may follow the boom, depending on the outcome of the reform and on whether government transfers offset wealth effects of tariffs. Observed booms in reforming economies are a noisy indicator of credibility because they reflect both policy uncertainty and real shocks, and the credibility component is determined in part by the properties of real shocks. Lack of credibility produces generally smaller fluctuations than those induced by real disturbances.