Optimal Intervention Policies for a Small Monetary Economy |
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Authors: | Theodore Palivos Chong K Yip |
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Institution: | (1) Department of Economics, University of Macedonia, 156 Egnatia Street, 54006 Salonica, Greece;(2) Department of Economics, The Chinese University of Hong Kong, Shatin, Hong Kong |
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Abstract: | We analyze the gains from trade for a small cash-in-advance economy with endogenous labor supply and learning-by-doing in
the accumulation of human capital. Contrary to previous findings, we show that free trade is not optimal independently of
the relative amount of cash required for the purchase of each good. Furthermore, a monetary rule à la Friedman can eliminate
distortions deriving from the cash-in-advance constraint only under segmented financial markets; in any case, it cannot restore
the economic optimum. Finally, we identify government intervention policies, such as wage and export subsidies, that can be
welfare improving. |
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Keywords: | optimal trade policies endogenous labor-leisure choice learning-by-doing |
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