A Paper by Stéphane Auray Published in the Journal of International Economics
“Self-enforcing trade policy and exchange rate adjustment”, a paper co-authored by Stéphane Auray, Professor of Economics at ENSAI and researcher at CREST, Michael B. Devereux and Aurélien Eyquem was published in Volume 134 of the Journal of International Economics.
The Journal of International Economics is a peer-reviewed academic journal. It is intended to serve as the primary outlet for theoretical and empirical research in all areas of international economics.
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 prices are fully flexible, we find that protectionism is basically acyclical. 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.
Exchange rates, Protectionism, Business cycle, Exchange rate regime
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Find out more about Stéphane Auray and research at ENSAI.