Temporary import and export quotas and the current account

Abstract

This paper provides a comprehensive analysis of temporary import and export quotas in a two-period optimization model imposing much weaker restrictions on preferences and production technologies than in the existing literature. We demonstrate that under net substitutability the imposition of a temporary quota which reduces imports by a small amount improves the current account and causes an appreciation of the real exchange rate. If the initial equilibrium is quota restricted, the effects of tightening the quota are ambiguous. By contrast, under substitutability, a tightening of export quotas necessarily leads to a current account deficit regardless of the nature of the initial equilibrium.