The choice of trade regime: delayed reform under productivity fluctuations and cost of structural change

Abstract

Despite the advantages of international trade, a number of countries have stuck to restricted trade regimes, allowing the productivity gap between themselves and the “trading” world to become huge before turning to a more outward oriented trade policy. As a supplement to the existing explanations for the hesitation to change trade regime, we present a model where the international productivity development shared by open economies, is uncertain. Due to uncertainty, it might be optimal to wait and maybe exercise the option to change trade regime later, i.e. to delay a trade reform.

Keywords:

• Trade policy
• uncertainty
• delayed reform
• stochastic optimal control