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Optimal Trade Policy in a Ricardian Model with Labor-Market Search-and-Matching Frictions

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  • Suwanprasert Wisarut

    (Department of Economics and Finance, Middle Tennessee State University, MTSU Box 27, Murfreesboro, TN 37132, USA)

Abstract

I develop a dynamic general-equilibrium model that combines the Diamond–Mortensen–Pissarides labor market with the standard Ricardian model of international trade to investigate the potential role of unemployment as a justification for trade policy implementation. First, I compare a competitive equilibrium and a constrained-efficient equilibrium and then establish the condition in which the competitive equilibrium is constrained-efficient. Second, I show that free trade is optimal only when labor market inefficiency is absent. A small open economy may employ expansionary trade policies (such as export subsidies or reduced import tariffs) if it experiences inefficiently high unemployment. This study provides a rationale behind countries’ tendency to use export subsidies.

Suggested Citation

  • Suwanprasert Wisarut, 2024. "Optimal Trade Policy in a Ricardian Model with Labor-Market Search-and-Matching Frictions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 24(2), pages 621-659.
    • Handle: RePEc:bpj:bejtec:v:24:y:2024:i:2:p:621-659:n:1006
    DOI: 10.1515/bejte-2023-0120
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    More about this item

    Keywords

    optimal trade policy; unemployment; Ricardian model; labor market; search-and-matching frictions; export subsidy;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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