Relative Responsiveness of Trade Flows to a Change in Prices and Exchange Rate

Abstract

A country can restrict her imports by imposing tariffs and stimulating her exports by providing subsidies. The same goal could be achieved through devaluation. One policy question that we face is the time it takes for either policy to affect the trade flows. We investigate here the relative responsiveness of the trade flows to a change in relative prices versus to a change in exchange rate. After estimating an error-correction version of import and export demand functions for nine industrial countries, unlike earlier studies that employed non-stationary data, our findings indicate that there is no specific answer and trade flows of different countries react differently.