Does it Matter Whether Market Distortions are Evaluated Using Comparative-statics or Dynamics?

Peter Mavromatis and George Verikios

Centre of Policy Studies/IMPACT Centre Working Papers from Victoria University, Centre of Policy Studies/IMPACT Centre

Abstract: We analyse the welfare outcomes of market distortions using a general-equilibrium model of a small, open economy that captures the trade-theoretic continuum from specific factors to Heckscher-Ohlin. We show the importance of two intrinsically dynamic phenomena on evaluating market distortions: structural change and imperfect factor mobility. We find that when these phenomena are captured in a dynamic framework, market distortions can generate welfare effects that contradict those generated by a comparative-static framework. We also find that the degree of factor mobility is important for accurately estimating the size of welfare effects. Our results suggest that market distortions should be evaluated in a dynamic framework that represents structural change and imperfect factor mobility, and that the degree of factor mobility should be treated as a parameter whose value is uncertain and subjected to sensitivity analysis.

Keywords: market distortions; welfare; comparative-statics versus dynamics; general equilibrium (search for similar items in EconPapers)
JEL-codes: C61 D58 D61 F13 (search for similar items in EconPapers)
Date: 2008-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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