Shock Versus Gradualism in Models of Rational Expectations: The Case of Trade Liberalization

by Susan Mary George

The twin assumptions of rational expectations (perfect foresight in deterministic models) and individual agents who implement optimal programs over time have generated a revision of many fundamental propositions in macroeconomics generally, and in the balance of payments literature in particular. One branch of this literature deals with the timing of policy changes and with the effect of those changes when they are expected to be transitory or to take place in the future.2 The purpose of this paper is to address within this framework the question of shock versus gradualism in the implementation of policies a question that has been raised mostly for stabilization and trade liberalization programs."

42 pages, ebook

First published September 1, 1997