GDC Working Papers

When unemployment arises, a country often imposes an import tariff since it supposedly expands the market share of domestic firms and encourages them to hire more workers. However, such a policy improves the current account and hence appreciates the home currency. Consequently, home products lose competitiveness against foreign products and eventually employment decreases, contrary to the prior expectation. It may create more trade restrictions and trade conflicts. This paper analyzes such a mechanism of an import tariff using an open-economy model with persistent stagnation in which exchange-rate adjustment is considered. Address: Institute of Social and Economic Research, Osaka University, 6-1, Mihogaoka, Ibaraki, Osaka, 567-0047, JAPAN E-mail: [email protected] TRADE POLICY, EXCHANGE-RATE ADJUSTMENT AND UNEMPLOYMENT