NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Market Power and Exchange Rate Adjustment in the Presence of Quotas

Joshua Aizenman

NBER Working Paper No. 2370 (Also Reprint No. r1403)
Issued in August 1987
NBER Program(s):   ITI   IFM

This paper investigates the dependency of the adjustment of prices, exchange rates, and production on the nature of the trade regime. We contrast the adjustment between a quota and a tariff regime for a 'semi-small' economy characterized by monopolistic competitive market structure and short-run nominal contracts under a floating exchange rate regime. Among other issues we focus on the factors determining the behavior of the quota rent and the 'pass- through' of exchange rate adjustment to the domestic prices of importable goods. We demonstrate that the 'pass-through ratio' (measuring the elasticity of the domestic price of importable goods with respect to the exchange rate) is determined by both the commercial policy and by the market power of the various producers. It tends to be higher in a tariff regime because the endogenous adjustment of the quota rent mitigates the 'pass-through'. We also show that the adjustment of the exchange rate tends to be larger in the quota regime than in the tariff regime. In the tariff regime we observe a larger switch of domestic demand relative to the quota regime, and a corresponding smaller exchange rate adjustment. In the quota regime we observe adjustment of the quota rent such as to keep the net domestic demand for foreign goods intact. As a result, the relative price (of the domestic good to the foreign good) facing the foreign consumer adjusts more in the quota regime than in the tariff regime. At the same time the relative price facing domestic consumers in the quota regime adjusts by less than in the tariff regime.

download in pdf format
   (320 K)

download in djvu format
   (162 K)

email paper

This paper is available as PDF (320 K) or DjVu (162 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w2370

Published: Journal of International Economics, Vol. 27, pp. 265-282, (1989).

 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us