Rules and Discretion in Trade Policy, Issue 2658
National Bureau of Economic Research, 1988 - Commercial policy - 20 pages
We argue in this paper that the second-best nature of trade-policy intervention makes it likely that the issue of time consistency viii be an important consideration in determining both the extent and the efficacy of such intervention in most environments. The point is seen most directly by noting that a tariff is both a tax on consumers and a subsidy to producers of the import-competing good. Since first-best intervention typically calls for targeting each distortion with a separate tax/subsidy, the tariff will be a more effective policy tool if its consumption tax aspect can be separated from its production subsidy dimension. Consequently, if production decisions are made prior to consumption decisions, a government with sufficient policy flexibility will be tempted to surprise producers with policies other than those announced in an effort to make this separation. This leads optimal trade policy intervention to be time-inconsistent in a wide range of environments. We explore this idea in general terms and illustrate the results with specific examples.
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activist trade policy allocation of labor allocation of productive analysis assumption autarky best or worse Bhagwatl Bureau of Economic commodity consider consistent equilibrium consumption decisions consumption tax consumption tax/subsidy cost Dani Rodrik Debt DISCRETION IN TRADE domestic consumption distortion domestic government domestic production distortion Economic Research effect environment ex-ante expected expected utility forthcoming government chooses Hence incentive to surprise inconsistency injured sector instruments Jeffrey Sachs Kenneth Rogoff marginal utility Market Massachusetts Avenue National Bureau Newbery and Stiglitz open economy optimal policy optimal trade policy Pareto frontier Pareto inferior policy discretion policy surprises precommit private sector producer and consumer production function production subsidy production tax/subsidy productive resources protective policy redistribute income resource allocation risky sector RULES AND DISCRETION rules versus discretion Section set the tariff small open economy Sovereign Debt surprise producers tariff revenue Terms of Trade time-inconsistent trade policy actions trade policy intervention unit of capital wage differential Zvi Griliches