Trade policy dynamics, entry costs, and exchange rate uncertainty
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.
Volume (Year): 21 (2012)
Issue (Month): 2 (December)
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