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Real Exchange Rate Effects of Fiscal Expansion under Trade Restrictions

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  • Panos Hatzipanayotou
  • Michael S. Michael

Abstract

We develop a small open-economy trade model where either a tariff, or a quota, or a voluntary export restraint (VER) exists, and where one exported, one imported, one non-traded, and one public good are produced. Within this context we examine the effects of fiscal expansion on welfare and the real exchange rate (RER). Among other things, it is demonstrated that when the direct social profitability effect of the public good is positive and the public good is a net complement to the non-traded good, fiscal expansion causes an appreciation of the RER under free trade, and under a tariff when the public good is also a net complement to the imported good. The paper identifies additional conditions required to ensure the appreciation of the RER, due to fiscal expansion, under an import quota or a VER.

Suggested Citation

  • Panos Hatzipanayotou & Michael S. Michael, 1997. "Real Exchange Rate Effects of Fiscal Expansion under Trade Restrictions," Canadian Journal of Economics, Canadian Economics Association, vol. 30(1), pages 42-56, February.
  • Handle: RePEc:cje:issued:v:30:y:1997:i:1:p:42-56
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    Cited by:

    1. Panos Hatzipanayotou & Sajal Lahiri & Michael S. Michael, 2002. "Reforms of Environmental Policies in the Presence of Cross-border Pollution and Two-stage Clean-up," CESifo Working Paper Series 638, CESifo Group Munich.
    2. Panos Pashardes & Soteroula Hajispyrou, 2002. "Consumer Demand and Welfare under Increasing Block Pricing," University of Cyprus Working Papers in Economics 0207, University of Cyprus Department of Economics.
    3. Michael Haliassos, 2002. "Stockholding: Recent Lessons from Theory and Computations," University of Cyprus Working Papers in Economics 0206, University of Cyprus Department of Economics.

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