July 1, 2000
Trade protection remains a prominent feature of the current world economy and likely has significant effects on industries and macroeconomies. In this paper a particular type of policy, price supports, is analyzed in a two-country, dynamic, general equilibrium model. This model brings new perspectives to the analysis in that it is monetary and has labor mobility within countries between the traded-goods and non-traded-goods sectors. It is found that: (1) The introduction of price supports in an economy benefits only the agents currently working in the traded-goods sector. (2) Cooperation among countries in setting policies results in a higher level of price supports than does noncooperation. (3) Price-support policies can importantly affect the transmission of monetary policy effects, introducing permanent changes in real variables where there were none before and even reversing the signs of changes in some variables.