A note on export subsidies and exchange rates
Orbay, Benan Zeki and Orbay, Hakan (2007) A note on export subsidies and exchange rates. (Submitted)
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This note investigates effects of exchange rate uncertainty on optimal trade policies and market prices within a standard export subsidy model. As exchange rate changes, relative efficiencies of firms in different countries change. In accordance with the conventional result, we show that changes in expected exchange rate effects optimal subsidies through relative costs. In particular, increase in expected depreciation of own currency increases subsidy levels when marginal cost is constant. Introducing import dependency, however, violates this uniform relation, and subsidy levels may decrease with increasing depreciation. Subsidy levels always decrease in import dependency when depreciation is expected. We also show that market price is less sensitive to exchange rates, compared to the free trade case (no subsidies).
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