Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 96: Effects of Trade Liberalization on Domestic Prices: Some Evidence from Tunisian Manufacturing

Ali Saggay (), Almas Heshmati () and Mohamed Adel Dhif ()
Additional contact information
Almas Heshmati: Ratio, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden

Abstract: This paper presents estimates of the competitive effects of trade liberalization on domestic pricing behaviour of Tunisian manufacturing industries. The theoretical framework is based on a dynamic flexible adjustment model of price determination in a small open economy. It investigates the process of adjustment in price level toward a desired level. The adjustment process is both industrial and time-specific. The empirical results show that, in the long run, domestic price responds greatly to import penetration, followed by demand pressure. There was a negative effect from import competition on domestic price. Trade policy is a viable policy option to promote competitiveness.

Keywords: dynamic model; domestic price; trade liberalization; panel data; speed of adjustment; Tunisia

JEL-codes: C33; E31; F14; L60

31 pages, April 25, 2006

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