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Tariffs, Habit Persistence, and the Current Account

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  • Arman Mansoorian
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    Abstract

    This paper emphasizes the importance of habit persistence in determining the effect of a permanent distortionary tariff on the current account. A distortionary tariff reduces real permanent income, requiring a fall in the standard of living. If the marginal utility of real consumption is strongly increasing in the habitual standard of living, then aggregate savings falls and the country runs a current account deficit. However, if the marginal utility of real consumption is not sufficiently strongly increasing (or is decreasing) in the habitual standards, then the tariff leads to a rise in savings and a current account surplus.

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    File URL: http://links.jstor.org/sici?sici=0008-4085%28199302%2926%3A1%3C194%3ATHPATC%3E2.0.CO%3B2-0
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    Bibliographic Info

    Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

    Volume (Year): 26 (1993)
    Issue (Month): 1 (February)
    Pages: 194-207

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    Handle: RePEc:cje:issued:v:26:y:1993:i:1:p:194-207

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    Cited by:
    1. Ikeda, Shinsuke & Gombi, Ichiro, 2009. "Habit Formation In An Interdependent World Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 13(04), pages 477-492, September.
    2. Shinsuke Ikeda, 2003. "Tariffs, Time Preference, and the Current Account under Weakly Nonseparable Preferences," Review of International Economics, Wiley Blackwell, vol. 11(1), pages 101-113, February.
    3. Johdo, Wataru, 2009. "Habit persistence and stagnation," Economic Modelling, Elsevier, vol. 26(5), pages 1110-1114, September.
    4. Arman Mansoorian & Simon Neaime, 1996. "Habits and Durability in Consumption, and the Effects of Tariff Protection," Working Papers 1996_02, York University, Department of Economics.

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