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Anticipated Protectionist Policies, Real Exchange Rates and the Current Account

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  • Sebastian Edwards
  • Jonathan D. Ostry

Abstract

In this paper a general equilibrium intertemporal model, with optimizing consumers and producers, is developed to analyze how the anticipation of future import tariffs affects real exchange rates and the current account. The model is completely real, and considers a small open economy that produces and consumes three goods each period. It is shown that, without imposing rigidities or adjustment costs, interesting paths for the equilibrium real exchange rate can be generated. In particular "equilibrium overshooting" can be observed. Precise conditions under which an anticipated future import tariff will worsen the current account in period 1 are derived. Several ways in which the model can be extended are also discussed in detail. The results obtained from this model have important implications for the analysis of real exchange rate misalignment and overvaluation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2214.

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Date of creation: Apr 1987
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Publication status: published as "Anticipated Protectionist Policies, Real Exchange Rates, and the Current Account: The Case of Rigid Wages." From Journal of International Money and Finance, Vol. 9, pp. 206-219, (1990).
Handle: RePEc:nbr:nberwo:2214

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  1. Joshua Aizenman, 1983. "Tariff Liberalization Policy and Financial Restrictions," NBER Working Papers 1253, National Bureau of Economic Research, Inc.
  2. Jacob A. Frenkel & Assaf Razin, 1986. "Fiscal Policies and Real Exchange Rates in the World Economy," NBER Working Papers 2065, National Bureau of Economic Research, Inc.
  3. Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
  4. 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.
  5. Torsten Persson & Lars E.O. Svensson, 1983. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," NBER Working Papers 1129, National Bureau of Economic Research, Inc.
  6. 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.
  7. Edwards, Sebastian & van Wijnbergen, Sweder, 1986. "The Welfare Effects of Trade and Capital Market Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 141-48, February.
  8. Dixit,Avinash & Norman,Victor, 1985. "Theory of International Trade," Cambridge Books, Cambridge University Press, number 9780521299695, April.
  9. Alan C. Stockman & Harris Dellas, 1987. "Asset Markets, Tariffs, and Political Risk," NBER Working Papers 1413, National Bureau of Economic Research, Inc.
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Cited by:
  1. Sebastian Edwards, 1988. "Temporary Terms of Trade Disturbances, The Real Exchange Rate and the Current Account," NBER Working Papers 2629, National Bureau of Economic Research, Inc.
  2. Reinhart, Carmen & Ogaki, Masao & Ostry, Jonathan, 1995. "Saving behavior in low- and middle-income developing countries," MPRA Paper 13757, University Library of Munich, Germany.
  3. Yang, Lucun, 2011. "An Empirical Analysis of Current Account Determinants in Emerging Asian Economies," Cardiff Economics Working Papers E2011/10, Cardiff University, Cardiff Business School, Economics Section.
  4. Joannes Mongardini & Alexander Chudik, 2007. "In Search of Equilibrium," IMF Working Papers 07/90, International Monetary Fund.

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