Urban unemployment and optimal trade policy in a cash-in-advance economy

This paper examines the welfare effects of commercial and tax/subsidy polic ies on a developing economy with sectoral unemployment and differential cas h-in-advance constraints. The optimal tariff can be negative when the cash- in-advance requirement for buying the importable good is larger than that f or the exportable good. Zn addition, when capital is sectorally mobile, pro duction taxes are superior to production subsidies to the importable sector . Nevertheless, to reach the first-best optimum, a uniform wage subsidy to both sectors is required.