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Tariffs, Capital Accumulation, and the Current Account in a Small Open Economy

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  • Sen, Partha
  • Turnovsky, Stephen J

Abstract

This paper analyzes the effects of tariffs in an intertemporal optimizing framework emphasizing the role of capital accumulation. Unanticipated permanent, anticipated temporary, and anticipated permanent increases in the tariff rate are considered. In all cases, the introduction of a tariff is contractionary both in the short run and in the long run. The declining capital stock is accompanied by a current account surplus. The response of savings is unclear. The model has the property that the steady state depends upon the initial stocks of assets. As a consequence of this, a temporary tariff has a permanent (contractionary) effect on the economy. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 30 (1989)
Issue (Month): 4 (November)
Pages: 811-31

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Handle: RePEc:ier:iecrev:v:30:y:1989:i:4:p:811-31

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  1. Andrew B. Abel & Olivier J. Blanchard, 1983. "An Intertemporal Model of Saving and Investment," NBER Working Papers 0885, National Bureau of Economic Research, Inc.
  2. Sebastian Edwards, 1987. "Tariffs, Terms of Trade, and the Real Exchange Rate in an Intertemporal Optimizing Model of the Current Account," NBER Working Papers 2175, National Bureau of Economic Research, Inc.
  3. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
  4. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
  5. Krugman, Paul, 1982. "The macroeconomics of protection with a floating exchange rate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 16(1), pages 141-182, January.
  6. Charles Engel & Kenneth Kletzer, 1986. "Tariffs, Saving and the Current Account," NBER Working Papers 1869, National Bureau of Economic Research, Inc.
  7. Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
  8. Eichengreen, Barry J., 1981. "A dynamic model of tariffs, output and employment under flexible exchange rates," Journal of International Economics, Elsevier, vol. 11(3), pages 341-359, August.
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