Endogenous Trade Protection and Exchange Rate Adjustment

44 Pages Posted: 4 Feb 2019

See all articles by Stéphane Auray

Stéphane Auray

École Nationale de la Statistique et de l'Analyse de l'Information (ENSAI)

Michael B. Devereux

University of British Columbia (UBC) - Department of Economics; Centre for Economic Policy Research (CEPR)

Aurélien Eyquem

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Date Written: January 2019

Abstract

This paper explores the relationship between exchange rate adjustment and trade policy in a simple New Keynesian open economy macro model. We show that movement in exchange rates have a direct implication for trade policy when governments choose tariffs endogenously. In particular, we show that the strategic incentive to impose trade restrictions is greater under flexible exchange rates than when exchange rates are fixed. This surprising result goes counter to conventional wisdom, which suggests that pressures to impose trade restrictions are greater when countries resist adjustments in exchange rates. But in fact, we show that the empirical evidence supports the model predictions. The paper goes on to characterize the path of equilibrium sustainable tariffs in the presence of sticky prices and flexible exchange rates. In our baseline model, tariff rates will rise in response to monetary policy shocks, but fall in response to productivity shocks. Estimating an SVAR model, we also find evidence in support of this prediction.

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Suggested Citation

Auray, Stéphane and Devereux, Michael B. and Eyquem, Aurélien, Endogenous Trade Protection and Exchange Rate Adjustment (January 2019). NBER Working Paper No. w25517. Available at SSRN: https://ssrn.com/abstract=3328384

Stéphane Auray (Contact Author)

École Nationale de la Statistique et de l'Analyse de l'Information (ENSAI) ( email )

Rennes Métropole - Campus de Ker Lann
Rue Blaise Pascal
BP 37203- 35172 BRUZ Cedex
France

Michael B. Devereux

University of British Columbia (UBC) - Department of Economics ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada
604-822-2542 (Phone)
604-946-6271 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Aurélien Eyquem

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

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