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Federal Reserve Bank of Minneapolis
Staff Report
The Interaction and Sequencing of Policy Reforms
Timothy J. Kehoe
Jose Asturias
Sewon Hur
Kim J. Ruhl
Abstract

In what order should a developing country adopt policy reforms? Do some policies complement each other? Do others substitute for each other? To address these questions, we develop a two-country dynamic general equilibrium model with entry and exit of firms that are monopolistic competitors. Distortions in the model include barriers to entry of firms, barriers to international trade, and barriers to contract enforcement. We find that a reform that reduces one of these distortions has different effects depending on the other distortions present. In particular, reforms to trade barriers and barriers to the entry of new firms are substitutable, as are reforms to contract enforcement and trade barriers. In contrast, reforms to contract enforcement and the barriers to entry are complementary. Finally, the optimal sequencing of reforms requires reforming trade barriers before contract enforcement.


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Timothy J. Kehoe & Jose Asturias & Sewon Hur & Kim J. Ruhl, The Interaction and Sequencing of Policy Reforms, Federal Reserve Bank of Minneapolis, Staff Report 521, 23 Nov 2015.
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Keywords: Sequencing reforms; Trade barriers; Entry barriers; Contract enforcement
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