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Tariff risk and international borrowing with incomplete asset markets

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  • Michael R. Pakko

Abstract

When residents of two countries have access to complete contingent claims markets, the welfare effects of changes in tariffs are opposite to those found in static trade theory. This paper demonstrates that a much simpler asset market structure can be sufficient to generate such a result. In the context of a two period model with asset trade restricted to simple bonds, I decompose wealth and substitution effects that underlying the impact oftariff changes on consumption and the current account. Use of this relatively simple model helps to provide intuitive insight and facilitates the use of an illustrative diagrammatic framework.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1996-011.

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Date of creation: 1996
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Handle: RePEc:fip:fedlwp:1996-011

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Keywords: International trade ; Tariff;

References

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  1. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  2. Ostry, Jonathan D. & Rose, Andrew K., 1992. "An empirical evaluation of the macroeconomic effects of tarrifs," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 63-79, February.
  3. Marianne Baxter & Mario J. Crucini, 1994. "Business Cycles and the Asset Structure of Foreign Trade," NBER Working Papers 4975, National Bureau of Economic Research, Inc.
  4. Alan C. Stockman & Harris Dellas, 1987. "Asset Markets, Tariffs, and Political Risk," NBER Working Papers 1413, National Bureau of Economic Research, Inc.
  5. Barari, Mahua & Lapan, Harvey E., 1993. "Stochastic Trade Policy with Asset Markets: The Role of Tariff Structure," Staff General Research Papers 10042, Iowa State University, Department of Economics.
  6. Jonathan D. Ostry, 1988. "The Balance of Trade, Terms of Trade, and Real Exchange Rate: An Intertemporal Optimizing Framework," IMF Staff Papers, Palgrave Macmillan, vol. 35(4), pages 541-573, December.
  7. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
  8. Lloyd A. Metzler, 1949. "Tariffs, the Terms of Trade, and the Distribution of National Income," Journal of Political Economy, University of Chicago Press, vol. 57, pages 1.
  9. Cole, Harold, 1988. "Financial Structure and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 237-59, May.
  10. Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
  11. Jones, Ronald W, 1969. "Tariffs and Trade in General Equilibrium: Comment," American Economic Review, American Economic Association, vol. 59(3), pages 418-24, June.
  12. Jones, Ronald W, 1985. "Income Effects and Paradoxes in the Theory of International Trade," Economic Journal, Royal Economic Society, vol. 95(378), pages 330-44, June.
  13. Sadorsky, Perry, 1994. "The Behavior of U.S. Tariff Rates: Comment," American Economic Review, American Economic Association, vol. 84(4), pages 1097-1103, September.
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