Shadow prices and trade restrictions in a monetary economy

Abstract

Using a cash-in-advance (CIA) framework, this paper examines the shadow price of foreign exchange under three types of trade restrictions. The CIA constraint creates a consumption distortion that alters the recipient's welfare. If the effective cash requirement for a unit of the exportable becomes smaller (larger), foreign transfer improves (reduces) welfare and hence the shadow price is greater (less) than unity. Both cases of untied and tied foreign transfer are examined.