TY  - JOUR
AU  - Calvo,Guillermo A.
AU  - Drazen,Allan
TI  - Uncertain Duration of Reform: Dynamic Implications
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5925
PY  - 1997
Y2  - February 1997
UR  - http://www.nber.org/papers/w5925
L1  - http://www.nber.org/papers/w5925.pdf
N1  - Author contact info:
Guillermo A. Calvo
Columbia University
School of International and Public Affairs
420 West 118th St, Room 1303B
MC3332
New York, NY 10027
Tel: 212/854-4264
E-Mail: gc2286@columbia.edu

Allan Drazen
Department of Economics
University of Maryland
College Park, MD 20742
Tel: 301/405-3477
Fax: 301/405-7835
E-Mail: drazen@econ.umd.edu
AB  - We develop a framework to study the effects of policies of uncertain duration on consumption dynamics under both complete and incomplete markets.  We focus on the dynamic implications of market incompleteness, specifically on the lack of state-contingent bonds.  Two policies are considered: pure output-increasing and tariff-reducing (trade liberalization).  With" complete markets, the output-increasing policy leads to flat consumption, while with no contingent assets, consumption jumps upward on the announcement of the policy, continues rising as long as the policy is in effect, and collapses when it is abandoned.  A similar consumption path obtains in a trade liberalization in the realistic case of low elasticity of substitution and no rebate of tariffs.  Market incompleteness rationalizes the existence of gradual changes in consumption.
ER  -