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Strategic Trade Policy and Exchange Rate Uncertainty

Fernando Mesa ()

Archivos de Economía from Departamento Nacional de Planeación

Abstract: This paper examines the systematic e¤ect of the exchange rate volatility, when a local government has to evaluate linear and quadratic strategic trade policies. The exercise is realised for both Cournot and Bertrand markets fashions. In the Cournot market setting, when the domestic government o¤ers subsidies to local …rms, the international rent shifts toward domestic …rms. In the Bertrand market setting, when the domestic government imposes export taxes on local …rms, the trade policy improves …rm’s pro…ts and obviously hurts consumer surplus. The model proofs that the linear or quadratic scheme have the same e¤ect on the countries’ social welfare, and the volatility of the domestic exchange rate leads the governments to reduce export subsidies or to cut export taxes, according to the strategic variable chosen by …rms.

Keywords: Trade (search for similar items in EconPapers)
Date: 2001-11-14
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