Dynamics of Trade Liberalization

Abstract: The basic premise of this paper is that trade liberalization has important dynamic implications which are beyond the scope of static applied general equilibrium models. We argue that incorporating intertemporal optimization in applied general equilibrium modeling is a primising way to capture the dynamics of commercial policy. In particular, this allows one, not only to pin down the growth effects often attributed to liberalization efforts, but also to evaluate these in welfare terms.Moreover, current account adjustment may be addressed in a consistent way. We offer a brief survey of the relevant literature and then illustrate our point by presenting a specific computational model which is calibrated to Austrian data. Our model features overlapping generations with life-time uncertainty. Investment and savings are determined by intertemporal optimization under perfect foresight. The model presentation especially emphasizes the implications of overlapping generations for household dynamics and the measurement of welfare effects. We briefly comment on calibration of dynamic parameters, and then apply the calibrated model to various commercial policy scenarios.;