A Dynamic Model with Import Quota Constraints

43 Pages Posted: 6 Aug 2002

See all articles by Anna Pavlova

Anna Pavlova

London Business School; Centre for Economic Policy Research (CEPR)

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2002

Abstract

This Paper develops a continuous-time two-sector model to study the economic effects of an import quota during the period of time over which it is imposed. One of the sectors is protected by a quota, which in our set-up manifests itself as an integral constraint on the flow of imports of the protected commodity. In sharp contrast to the existing literature, our small open economy exhibits distinctly different economic behaviour depending on whether the country is importing the protected good, exporting it or refraining from trade in it. The domestic price of the protected good exceeds the world price in import and no-trade regions, even when the quota is underutilized - in contrast, existing work predicts no economic effects of a quota unless it is binding. Within a general equilibrium world economy consisting of one quota-constrained and one unconstrained country, under logarithmic preferences, the constrained country becomes wealthier at the expense of the unconstrained. Moreover, the stock price of the protected industry increases in the quota-constrained and decreases in the unconstrained country.

Keywords: Quota, international economics and finance, asset pricing, integral constraints

JEL Classification: D51, F13, F30, F40, G12

Suggested Citation

Pavlova, Anna and Basak, Suleyman, A Dynamic Model with Import Quota Constraints (June 2002). CEPR Discussion Paper No. 3414. Available at SSRN: https://ssrn.com/abstract=321071

Anna Pavlova

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7000 8218 (Phone)

HOME PAGE: http://faculty.london.edu/apavlova

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Suleyman Basak (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)

HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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