Optimal Trade Policy in a Ricardian Model with Labor-Market Search-and-Matching Frictions

Wisarut Suwanprasert

The B.E. Journal of Theoretical Economics, 2024, vol. 24, issue 2, 621-659

Abstract: I develop a dynamic general-equilibrium model that combines the Diamond–Mortensen–Pissarides labor market with the standard Ricardian model of international trade to investigate the potential role of unemployment as a justification for trade policy implementation. First, I compare a competitive equilibrium and a constrained-efficient equilibrium and then establish the condition in which the competitive equilibrium is constrained-efficient. Second, I show that free trade is optimal only when labor market inefficiency is absent. A small open economy may employ expansionary trade policies (such as export subsidies or reduced import tariffs) if it experiences inefficiently high unemployment. This study provides a rationale behind countries’ tendency to use export subsidies.

Keywords: optimal trade policy, unemployment; Ricardian model, labor market, search-and-matching frictions; export subsidy (search for similar items in EconPapers)
JEL-codes: F13 F16 J64 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/bejte-2023-0120

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