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Export Subsidies and Exchange Rate Pass‐through
Author(s) -
Orbay Hakan,
Orbay Benan Zeki
Publication year - 2013
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12060
Subject(s) - subsidy , depreciation (economics) , economics , exchange rate , export subsidy , monetary economics , currency , exchange rate pass through , international economics , microeconomics , market economy , profit (economics) , capital formation , financial capital
This paper investigates effects of exchange rate on optimal trade policies and market prices within a standard export subsidy model. Shifts in exchange rate change relative efficiencies of firms in different countries. We show that depreciation of own currency increases subsidy levels when marginal cost is constant. Import dependency weakens this relationship, decreasing sensitivity of subsidy levels to depreciation. In general, subsidies reduce exchange rate pass‐through. Additionally, perverse exchange rate pass‐through effect arises with sufficiently intensive subsidies.