Trade policy dynamics, entry costs, and exchange rate uncertainty

TY - JOUR

T1 - Trade policy dynamics, entry costs, and exchange rate uncertainty

AU - Kongsted, Hans Christian

N1 - JEL Classifications: F13, D92, E22

PY - 2012/4

Y1 - 2012/4

N2 - This article analyzes trade policy dynamics when there are sunk costs of entry and demand uncertainty. A natural generalization of the classic export tax prescription for a domestic industry facing downward-sloping foreign demand is defined and implemented as a dynamic competitive equilibrium with fully rational firms. The optimal tax rate adjustment policy is a trigger strategy. This provides a rationale for infrequent revisions of trade policy in response to exogenous shocks.

AB - This article analyzes trade policy dynamics when there are sunk costs of entry and demand uncertainty. A natural generalization of the classic export tax prescription for a domestic industry facing downward-sloping foreign demand is defined and implemented as a dynamic competitive equilibrium with fully rational firms. The optimal tax rate adjustment policy is a trigger strategy. This provides a rationale for infrequent revisions of trade policy in response to exogenous shocks.

U2 - 10.1080/09638191003599527

DO - 10.1080/09638191003599527

M3 - Journal article

SN - 0963-8199

VL - 21

SP - 197

EP - 216

JO - Journal of International Trade and Economic Development

JF - Journal of International Trade and Economic Development

IS - 2

ER -