Working Paper: NBER ID: w2165
Authors: Charles R. Blitzer; Partha Dasgupta; Joseph E. Stiglitz
Abstract: In an earlier paper, we showed that the value of shadow prices depends on how the government contemplates re- equilibrating the economy to the perturbation associated with any project, except in the extreme case where the government has chosen all policy instruments optimally. Only under restrictive conditions will relative shadow prices for traded goods equal relative international prices. We develop here a general methodology for calculating shadow prices, which expresses the prices as a weighted average of domestic and international prices. The formulae provide the conditions under which the border price rule is valid. For instance, so long as there are non-traded goods, even if the government leaves tariffs unchanged (so that relative domestic prices of traded goods remain unchanged), unless the government completely neutralizes the induced change in domestic income, there will be changes in the prices of non-traded goods. These will preclude the use of the border price rule.
Keywords: shadow prices; project appraisal; foreign exchange constraints
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government actions (H59) | shadow prices (P22) |
| projects (O22) | domestic income (D31) |
| projects (O22) | government revenue (H27) |
| projects (O22) | foreign exchange (F31) |
| government fiscal actions (E62) | shadow prices (P22) |
| government adjustments (E64) | shadow prices (P22) |
| government adjustments (E64) | welfare outcomes (I38) |
| government response to project-induced perturbations (H12) | shadow prices (P22) |
| government response to project-induced perturbations (H12) | welfare outcomes (I38) |
| government's approach to re-equilibration (H19) | shadow price calculations (G19) |
| government actions (H11) | prices of nontraded goods (P22) |
| government actions (H59) | applicability of the border price rule (F16) |
| shadow prices (P22) | international prices (P22) |