NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trade Liberalization in Disinflation

Dani Rodrik

NBER Working Paper No. 4419
Issued in August 1993
NBER Program(s):   IFM   ITI

There exists near-consensus among professional economists on the desirability of achieving macroeconomic stabilization prior to the removal of microeconomic distortions. Yet this advice was completely disregarded in some of the most important cases of reform during the last decade--Bolivia and Mexico since 1985, Poland since 1990, Argentina since 1991, for example. In these and many other cases, radical trade liberalization measures were put in place, or existing programs speeded up, in conjunction with macroeconomic stabilization packages. In this paper I revisit this issue by focusing on recent liberalizations in Latin America. I argue that the theoretical case for the existence of a policy dilemma in exchange-rate management when trade liberalization is implemented simultaneously with stabilization policies is weaker than is usually presupposed. A commitment to a pegged exchange rate can, if credible, actually solve rather than intensify the potential conflict between trade liberalization and exchange-rate stability. However, the credibility of disinflation may be endangered by early liberalization.

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Document Object Identifier (DOI): 10.3386/w4419

Published: P.B. Kenen (ed.), Understanding Interdependence: The Macroeconomics of the Open Economy, Princeton, NJ, Princeton University Press, 1995

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