| dc.description.abstract | This paper derives optimal trade and domestic taxes for a small open economy
containing a monopolistically competitive (MC) sector in which firms may have
heterogeneous productivity levels. Analysis encompasses cases in which the
domestic MC sector is able to expand or contract flexibly, or is constrained to be
of fixed size. In the former case domestic protection can bring gains by increasing
the number of product varieties on offer; these gains (and the corresponding rates
of domestic subsidy or of import tariffs) are reduced by heterogeneity of foreign
exporters some of whom may withdraw from the market. In the latter case gains
from protection arise from terms-of-trade effects; since various margins of
substitution are switched off, only the relative values of domestic taxes, import
tariffs and export taxes matter. In general, policies work through both a terms-oftrade
and a variety effect, and the paper shows how the relative importance of
each depends on the structure of the economy. | nb_NO |
