TRADE LIBERALIZATION, CREDIBILITY AND SELF-FULFILLING FAILURES

This paper addresses the question of whether there may be a self-fulfilling aspect to the failure of liberalization attempts when it is widely known the government will abandon the reform if the central bank suffers an unacceptably large loss in reserves. I derive the conditions for both sustained reform and a self-fulfilling failure to be equilibrium outcomes. Under certain well defined conditions, liberalization is most likely to succeed when the capital account is open.