| This dissertation extends the literature on the macroeconomic impact of trade liberalization in two important ways. The first branch of the research examines factors that may affect the sustainability of imperfectly credible trade liberalization. This branch of the research is motivated by the fact that trade liberalization in many developing countries has often resulted in balance of payment deterioration and a subsequent reversal in the reform. Accordingly, I develop a continuous-time, two-sector general equilibrium model with money in the utility function in order to examine whether the likelihood of policy reversal depends on the rate of tariff reduction or the degree of labor mobility. The analysis shows not only that transitory unemployment increases the likelihood of policy reversal, but also that a gradual reduction in the tariff rate can extend the life of the liberalization episode. However, gradual tariff reduction does not necessarily increase the likelihood of sustained liberalization.; The second branch of the research focuses on the liberalization of capital imports under perfect credibility. Since capital goods are a significant portion of total imports for many countries, the liberalization of import restrictions on capital goods may have important macroeconomic consequences. To analyze this issue, I develop a continuous-time, one-sector model, where noncompetitive imports are combined with a tradable good according to a CES function in order to produce an aggregate, operational unit of capital. The analysis is performed when protection takes the form of a quota and when it takes the form of a tariff. Since tariff liberalization affects tax revenues, the analysis of tariff liberalization allows for a fiscal imbalance and a mechanism by which the fiscal imbalance is covered, namely an inflation tax. The analysis shows that the economy experiences a series of balance of payments deficits following trade liberalization, but an open capital account reduces the magnitude of these deficits. |
