Self-enforcing trade policy and exchange rate adjustment

Stéphane Auray, Michael Devereux and Aurélien Eyquem

Journal of International Economics, 2022, vol. 134, issue C

Abstract: We explore the cyclical pattern of trade protection in a simple New Keynesian open economy macro model. Tariff rates are determined endogenously in a sustainable equilibrium of a two country trade policy game. The incentive to levy tariffs is greater when the exchange rate is floating, since a fixed exchange rate removes the ability to manipulate the terms of trade. If price are fully flexible, we find that protectionism is basically a-cyclical. By contrast, with pre-set prices, tariffs respond to both monetary and productivity shocks. But the degree of protection may be pro-cyclical or counter-cyclical, depending on the pattern of shocks and parameter values.

Keywords: Exchange rates; Protectionism; Business cycle; Exchange rate regime (search for similar items in EconPapers)
JEL-codes: F30 F40 F41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:134:y:2022:i:c:s002219962100132x

DOI: 10.1016/j.jinteco.2021.103552

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