Protective Trade Policies 'Reduce' Employment: A Dynamic Optimization Approach
AbstractUsing a competitive two-country two-commodity monetary model with optimizing agents in which persistent unemployment arises, this paper examines the effects of trade restrictions on consumption and employment in the two countries. When facing unemployment, a country tends to impose an import restriction so that domestic firms will increase production and raise employment. However, this policy improves the current account and hence its currency appreciates, causing its products to lose international competitiveness. Therefore, employment and consumption eventually decrease in the country while in the foreign country its currency depreciates and hence employment and consumption increase.
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Bibliographic InfoPaper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0659.
Date of creation: Apr 2006
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