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Protective Trade Policies 'Reduce' Employment: A Dynamic Optimization Approach

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  • Yoshiyasu Ono

Abstract

Using 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 Info

Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0659.

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Date of creation: Apr 2006
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Handle: RePEc:dpr:wpaper:0659

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  1. Chi-Chur Chao & Chong Yip, 2000. "Urban unemployment and optimal trade policy in a cash-in-advance economy," Journal of Economics, Springer, vol. 71(1), pages 59-77, February.
  2. Lane, Philip R., 1999. "The New Open Economy Macroeconomics: a Survey," CEPR Discussion Papers 2115, C.E.P.R. Discussion Papers.
  3. Ono, Y. & Ogawa, K. & Yoshida, A., 1998. "Liquidity Preference and Persistent Unemployment with Dynamic Optimizing Agents," ISER Discussion Paper 0461, Institute of Social and Economic Research, Osaka University.
  4. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-60, June.
  5. Van Der Ploeg, F., 1990. "Channels Of International Policy Transmission," Papers 9059, Tilburg - Center for Economic Research.
  6. Devereux, M.B. & Betts, C., 1999. "International Monetary Policy Coordination and Competitive Depreciation: A Re-Evaluation," UBC Departmental Archives 99-07, UBC Department of Economics.
  7. Lahiri, S. & Ono, Y., 1995. "Optimal Tariffs in the Presence of Middlemen," ISER Discussion Paper 0389, Institute of Social and Economic Research, Osaka University.
  8. Hau, Harald, 2000. "Exchange rate determination: The role of factor price rigidities and nontradeables," Journal of International Economics, Elsevier, vol. 50(2), pages 421-447, April.
  9. Choi, E Kwan & Beladi, Hamid, 1993. "Optimal Trade Policies for a Small Open Economy," Economica, London School of Economics and Political Science, vol. 60(240), pages 475-86, November.
  10. Shinsuke Ikeda, 2003. "Tariffs, Time Preference, and the Current Account under Weakly Nonseparable Preferences," Review of International Economics, Wiley Blackwell, vol. 11(1), pages 101-113, February.
  11. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  12. Sweder van Wijnbergen, 1987. "Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism," NBER Working Papers 2261, National Bureau of Economic Research, Inc.
  13. Bruno Larue & Jean-Philippe Gervais, 2002. "Welfare-maximizing and revenue-maximizing tariffs with a few domestic firms," Canadian Journal of Economics, Canadian Economics Association, vol. 35(4), pages 786-804, November.
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