Commercial Policy and Aggregate Employment Under Rational Expectations

Commercial policy is often advocated as a useful tool for combating such macroeconomic ills as unemployment and chronic balance of payments deficits. This paper examines the role of expectations in determining the output and employment effects of various commercial policies. In a rational expectations framework in which workers have incomplete information, it is shown that (i) the short-run output and employment effects of commercial policy changes depend crucially on the correlation between real and nominal wages and that (ii) the use of commercial policy as an instrument of short-run stabilization policy cannot be divorced from its long-run effects on real wages, output, and employment.