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The Losses from Trade Restrictions: Policy Dynamics with Firm Selection and Endogenous Markup
Author(s) -
Moon Soojae
Publication year - 2015
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.12160
Subject(s) - economics , recession , productivity , markup language , shock (circulatory) , terms of trade , exchange rate , position (finance) , international economics , general equilibrium theory , international trade , monetary economics , macroeconomics , medicine , finance , computer science , xml , operating system
In this paper, I explore the aggregate effects of trade restrictions in a two‐country, dynamic, general equilibrium ( DGE ) model with firm selection and variable adjustment of markup. As a response to the trade collapse in the global crisis of 2008 and 2009, temporary trade restrictions have emerged in several countries. With analyzing the dynamics of a negative macroeconomic shock in the home economy first, and the subsequent introduction of trade restrictions in the foreign economy second, I show that both economies are in a worse position than they were during the economic downturn. The follow‐ups to the recession and trade restrictions are investigated through three mechanisms: (1) variable markup as a new avenue of increasing competitive pressure for producers (e.g. more competitive firms lower their markups); (2) average individual firms' specific productivity cut‐off, which induces their optimum export choice (e.g. an increase in the export productivity cut‐off means exporting becomes more difficult than before.); and (3) the movement of international relative prices (e.g. the real exchange rate and terms of trade).