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Tariffs, the exchange rate, and location

Author

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  • Wataru Johdo

    (Tokyo Keizai University)

Abstract

This paper employs a new open economy macroeconomics model to examine the macroeconomic effects of a rise in one country's tariff rate leading to international relocation of firms. In such a model, both the real exchange rate and international relocation of firms offer the key to an understanding the impacts of the tariff policy. The main findings of our analysis are that (i) the imposition of a tariff by the home country always increases the relative home consumption, (ii) the imposition of the tariff results in appreciation of the home currency, (iii) the appreciation then decreases the relative real profits of firms located in the home country, and consequently firms relocate to the foreign country, (iv) an increase in the flexibility of relocation weakens the responses of both the relative consumption and the exchange rate to the imposition of the tariff.

Suggested Citation

  • Wataru Johdo, 2019. "Tariffs, the exchange rate, and location," Economics Bulletin, AccessEcon, vol. 39(2), pages 741-750.
    • Handle: RePEc:ebl:ecbull:eb-19-00253
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    Cited by:

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    More about this item

    Keywords

    Tariff; Relocation of firms; Exchange rate; Consumption;
    All these keywords.

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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