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Short and long run macroeconomic effects of trade policy in the presence of debt servicing

  • Economics


The purpose of this paper is to analyze the macroeconomic effects of tradepolicy, when the instrument is a voluntary export restraint (VER), on both thehome (imposing) country and the foreign (targeted) country. The innovationin the paper is the analysis of trade policy when debt servicing is present in thecurrent account of the balance of payments. This captures the contemporaryexperience of deficit nations like the USA vis-Ã -vis surplus countries likeChina. Trade policy (VER) in the short-run affects the current account andexchange rate, leading to the accumulation of debt stocks, which have to berepaid in the long-run in the form of debt servicing flows. This leads to a majordifference between the short and long-run effects of trade policy in the formof VERs, which can be expansionary and contractionary respectively for thetrade policy initiating nation.

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