TRADE REFORMS OF UNCERTAIN DURATION AND REAL UNCERTAINTY - A FIRST APPROXIMATION

This paper examines trade reforms of uncertain duration in economies a ffected by real shocks. These reforms induce consumption booms regardl ess of their duration and of the degree of intertemporal substitution. A recession may follow the boom, depending on the outcome of the refo rm and on whether government transfers offset wealth effects of tariff s. Observed booms in reforming economies are a noisy indicator of cred ibility 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 fluctua tions than those induced by real disturbances.