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Bilateral Tariffs Under International Competition

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  • Tsotne Kutalia
  • Revaz Tevzadze

Abstract

This paper explores the gain maximization problem of two nations engaging in non-cooperative bilateral trade. Probabilistic model of an exchange of commodities under different price systems is considered. Volume of commodities exchanged determines the demand each nation has over the counter party's currency. However, each nation can manipulate this quantity by imposing a tariff on imported commodities. As long as the gain from trade is determined by the balance between imported and exported commodities, such a scenario results in a two party game where Nash equilibrium tariffs are determined for various foreign currency demand functions and ultimately, the exchange rate based on optimal tariffs is obtained.

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  • Tsotne Kutalia & Revaz Tevzadze, 2020. "Bilateral Tariffs Under International Competition," Papers 2001.02426, arXiv.org.
    • Handle: RePEc:arx:papers:2001.02426
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    1. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
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