This paper uses a computable general equilibrium model of the economy of Trinidad and Tobago to assess the effects of trade liberalization and terms-of-trade shocks on the real exchange rate and the overall fiscal position of the government. The model is also used to evaluate the implications of alternative tax policies designed to offset the increase in the budget deficit of the central government that results from both types of external sector shocks.
-wide inflation and money growth obtained statistically significant estimates, but the cross-price effect from changes in the price of local rice is insignificant in the estimation. For imported rice, the results are consistent with the presence of large λ and λ j . Table 4. Substitution Effect Between Local and Imported Rice, 1999M12–2003M4 Estimate Standard Error (Dependent variable is the price of local rice) Change in the price of imported rice ( t ) 0.67 0.33* Sigma 0.10 R 2 0.10 Log
) that is, uncovered interest parity holds continuously. Under these conditions, a previously unanticipated current devaluation has no effect on the domestic nominal interest rate. This is the assumption in the models of Turnovsky (1981) , Burton (1983) , and Montiel (1986) . The effects of an anticipated future devaluation are straightforward. In the case of imperfect substitutes, this is represented by an increase in E ^ ¯ in equation (28), with E held constant. The domestic nominal interest rate will rise. If the own-price effect H 1 exceeds the cross-price
). The determination of t 3 , the optimal tax rate on financial savings, is of greater interest for this paper. The magnitude (and sign) of t 3 as is clear from equation (b), are influenced by a number of factors in addition to own- and cross-price elasticities. These factors are all a function of the preexisting distortions, θ ¯ 3 and θ ¯ 4 . The term in θ ¯ 4 is obvious. To the extent that the cross-price effect between C 3 and C 4 is nonzero, any change in the price of C 3 will interact with the pre-existing distortion on C 4 . This interaction should