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Trade policy dynamics, entry costs, and exchange rate uncertainty

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  • Hans Christian Kongsted

Abstract

This article analyzes trade policy dynamics when there are sunk costs of entry and demand uncertainty. A natural generalization of the classic export tax prescription for a domestic industry facing downward-sloping foreign demand is defined and implemented as a dynamic competitive equilibrium with fully rational firms. The optimal tax rate adjustment policy is a trigger strategy. This provides a rationale for infrequent revisions of trade policy in response to exogenous shocks.

Suggested Citation

  • Hans Christian Kongsted, 2012. "Trade policy dynamics, entry costs, and exchange rate uncertainty," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 21(2), pages 197-216, December.
  • Handle: RePEc:taf:jitecd:v:21:y:2012:i:2:p:197-216 DOI: 10.1080/09638191003599527
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    References listed on IDEAS

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