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Firms'responses to relative price changes in Cote d'Ivoire : the implications for export subsidies and devaluations

Author

Listed:
  • Newman, John L.
  • Lavy, Victor
  • Salomon, Raoul
  • de Vreyer, Philippe

Abstract

Since the early 1980s, export subsidies have been proposed as a way to counteract the adverse effects of an exchange rate overvaluation among member countries of the West African Monetary Union. It was felt that one way to alter the relative price of traded to nontraded goods was to attempt to mimic devaluation by raising import tariffs and export subsidies by the same proportion. This paper models the short-run response of firms to exogenous changes in export and import prices, taking into account the possibility that firms may sell to both domestic and foreign markets. The results suggest that firms in Cote d'Ivoire do sell more to the foreign market when it is more profitable to do so. Exports respond positively to increases in export prices and negatively to increases in import prices. But the fact that exports would be lower if an export subsidy were combined with an import tariff is not an argument for introducing an export subsidy alone because it would be insufficient to increase output in the tradable goods sector. The combination of an export subsidy with an import tariff, which comes closer to mimicking the effects of devaluation, would serve to counteract some of the adverse effects on output of an overvalued exchange rate.

Suggested Citation

  • Newman, John L. & Lavy, Victor & Salomon, Raoul & de Vreyer, Philippe, 1990. "Firms'responses to relative price changes in Cote d'Ivoire : the implications for export subsidies and devaluations," Policy Research Working Paper Series 550, The World Bank.
  • Handle: RePEc:wbk:wbrwps:550
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    References listed on IDEAS

    as
    1. Faini, Riccardo, 1994. "Export supply, capacity and relative prices," Journal of Development Economics, Elsevier, vol. 45(1), pages 81-100, October.
    2. Diewert, Walter E & Wales, Terence J, 1987. "Flexible Functional Forms and Global Curvature Conditions," Econometrica, Econometric Society, vol. 55(1), pages 43-68, January.
    3. Duncan, Gregory M., 1987. "A simplified approach to M-estimation with application to two-stage estimators," Journal of Econometrics, Elsevier, vol. 34(3), pages 373-389, March.
    4. Ulrich R. Kohli, 1978. "A Gross National Product Function and the Derived Demand for Imports and Supply of Exports," Canadian Journal of Economics, Canadian Economics Association, vol. 11(2), pages 167-182, May.
    5. Goldstein, Morris & Khan, Mohsin S, 1978. "The Supply and Demand for Exports: A Simultaneous Approach," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 275-286, May.
    6. Adrian Pagan, 1986. "Two Stage and Related Estimators and Their Applications," Review of Economic Studies, Oxford University Press, pages 517-538.
    7. Julio Nogués, 1990. "The experience of Latin America with export subsidies," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 126(1), pages 97-115, March.
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