Quotas v. Devaluation in the Small Open Economy

This paper compares the impact on welfare and inflation of a quota that generates the same cumulative payments surplus as a devaluation. If free trade prevails initially, the two policies have indentical welfare effects and give rise to the same path for the aggregate price level. When the implicit tariff is initially positive, however, welfare is lower and the price level higher for all time horizons under a quota. Copyright 1993 by The London School of Economics and Political Science.