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Optimal trade policy in tariff games with inside money

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  • Yu, Jun
  • Zhang, Shunming

Abstract

We construct a bilateral trade model incorporating two physical goods and a financial asset (inside money) to discuss the optimal trade policy that countries would choose to maximize their respective utilities. In this Nash tariff game, the trade of physical commodities only occurs geographically across countries, and the trade of inside money allows for intertemporal allocation of consumptions. When the preferences, present and future endowments for each country are given, according to our numerical analysis, trade surplus or deficit (inside money) and optimal tariff rates are endogenously determined when general equilibrium conditions hold. One country may purchase inside money to shift current consumption to the future, and the other may be willing to issue inside money for smoothing its consumptions in two periods. This imbalance trade contradicts traditional trade models which imply a balanced trade policy. We further find that the price of inside money as an implied interest rate also is determined by the trade intervention policies.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 4 (July)
Pages: 1604-1614

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:4:p:1604-1614

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: General equilibrium Nash equilibrium Tariff rate Trade imbalance;

References

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  1. Buiter, Willem H, 1981. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 769-97, August.
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Cited by:
  1. Li, Aijun & Lin, Boqiang, 2013. "Comparing climate policies to reduce carbon emissions in China," Energy Policy, Elsevier, vol. 60(C), pages 667-674.
  2. Juha Tervala & Giovanni Ganelli, 2012. "Tariff-Tax Reforms in Large Economies," IMF Working Papers 12/139, International Monetary Fund.

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