Learning and Economic Policy Choices

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This paper investigates whether governments embark on market-oriented reforms as a result of learning. I assume that governments are rational learners who update initial beliefs about the effectiveness of different policies and choose policies on the basis of the updated beliefs. The model of learning is applied to four policy choices: the decision to grant independence to central banks, the decision to liberalize trade, the decision to privatize, and the decision to enter into agreements with the IMF. I also explore whether convergence toward neo-liberal economic policies results from external imposition or simple imitation. I find that learning, in isolation from or in combination with the other mechanisms, explains the decision to liberalize trade, to privatize, and to enter into agreements with the IMF, while none of the mechanisms of convergence explains why governments grant independence to central banks.