Working Paper: NBER ID: w0715
Authors: J. David Richardson
Abstract: This paper describes the essential similarity between "modern" commercial policy, with its rent-like revenues, and capital transfers. Import barriers are shown to have consequently ambiguous effects on nominal and real exchange rates. The paper also examines some important supply-side welfare Costs and consequences of import barriers through their influence on current asset prices and future capital formation. The model on which the observations are based is an aggregated fixed-endowment, full-employment, general-equilibrium model similar to those used in the pure theory of international trade, with financial capital and foreign exchange markets that are integrated in a manner consistent with the asset/portfolio-balance approach to exchange rates. The model is empirically calibrated to reflect the U.S. and the rest of the world in the early 1980's. In this empirical stylization, U.S. import barriers are shown (1) to reduce national consumption possibilities more significantly than is usually thought to be the case; (ii) to discourage U.S. physical capital formation; and (iii) to have significant yet variable effects on exchange rates, where the variability depends on the distribution between the U.S. and the rest of the world of the rent-like revenues implicit in the import barriers. It is notable that the more favorable this distribution to the U.S. the larger is the dollar depreciation caused by import barriers.
Keywords: commercial policy; floating exchange rates; import barriers; capital formation; asset prices
JEL Codes: F13; F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income transfers implicit in modern commercial policy (F16) | consumption possibilities (D10) |
| income transfers implicit in modern commercial policy (F16) | capital formation (E22) |
| income transfers implicit in modern commercial policy (F16) | exchange rates (F31) |
| modern commercial policy (F13) | ambiguous effects on consumption possibilities (D11) |
| modern commercial policy (F13) | ambiguous effects on capital formation (E22) |
| modern commercial policy (F13) | ambiguous effects on exchange rates (F31) |
| import barriers (F14) | discourage physical capital formation (E22) |
| import barriers (F14) | raise domestic prices (E64) |
| import barriers (F14) | affect equity valuations (G12) |
| modern commercial policy (F13) | strengthen or weaken a currency (F31) |
| adjustment of commodity and asset prices (G13) | influence real trade (F19) |
| adjustment of commodity and asset prices (G13) | influence income distributions (D31) |