A Dynamic Model with Import Quota Constraints

Suleyman Basak and Anna Pavlova

No 3414, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper develops a continuous-time two-sector model to study the economic effects of an import quota during the period of time over which it is imposed. One of the sectors is protected by a quota, which in our set-up manifests itself as an integral constraint on the flow of imports of the protected commodity. In sharp contrast to the existing literature, our small open economy exhibits distinctly different economic behaviour depending on whether the country is importing the protected good, exporting it or refraining from trade in it. The domestic price of the protected good exceeds the world price in import and no-trade regions, even when the quota is underutilized ? in contrast, existing work predicts no economic effects of a quota unless it is binding. Within a general equilibrium world economy consisting of one quota-constrained and one unconstrained country, under logarithmic preferences, the constrained country becomes wealthier at the expense of the unconstrained. Moreover, the stock price of the protected industry increases in the quota-constrained and decreases in the unconstrained country.

Keywords: Quota; International economics and finance; Asset pricing; Integral constraints (search for similar items in EconPapers)
JEL-codes: D51 F13 F30 F40 G12 (search for similar items in EconPapers)
Date: 2002-06
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Related works:
Working Paper: A Dynamic Model with Import Quota Constraints (2004)
Working Paper: A DYNAMIC MODEL WITH IMPORT QUOTA CONSTRAINTS (2003)
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