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The Arbitrage Lobby: Theory and Evidence on Dual Exchange Rates

Published online by Cambridge University Press:  13 August 2021

Robert Gulotty Open the ORCID record for Robert Gulotty [Opens in a new window]  and
Dorothy Kronick Open the ORCID record for Dorothy Kronick [Opens in a new window]
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Abstract

Foundational theories of trade politics emphasize a conflict between consumer welfare and protectionist lobbies. But these theories ignore other powerful lobbies that also shape trade policy. We propose a theory of trade distortion arising from conflict between consumer welfare and importer lobbies. We estimate the key parameter of the model—the government's weight on welfare—using original data from Venezuela, where Hugo Chávez used an exchange-rate subsidy to underwrite hundreds of billions of dollars of imports. Whereas estimates from traditional models would make Chávez look like a welfare maximizer, our results indicate that he implemented distortionary commercial policy to the benefit of special interests. Our analysis underscores the importance of tailoring workhorse models to account for differences in interest group configuration. The politics of trade policy is not reducible to the politics of protectionism.

Keywords

Trade policyexchange ratespolitical economyVenezuela

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Type
Research Article
Information
International Organization , Volume 76 , Issue 1 , Winter 2022 , pp. 105 - 125
Copyright
Copyright © The IO Foundation 2021

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