Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism
AbstractUsing a standard complete specialization model of a small open economy within a rigorous intertemporal optimization framework with contract- based wage rigidity, we show that permanent tariffs may lead to a current account deterioration and a fall in employment, contradicting most of the literature of macro-economic effects of import tariffs. I show that this will always be the case if the economy is small enough. The crucial factor in this complete reversal of standard results is the impact of tariffs on domestic real product wages via wage indexation. Temporary tariffs will have less of a negative impact on the CA or potentially even a positive impact, because they increase the consumption rate of interest (the terms at which future consumption can be traded for current consumption) and so increase private savings. Extensions towards incorporating a more general production structure, investment and the use of tariff revenues to provide wage subsidies are presented.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2261.
Date of creation: May 1987
Date of revision:
Note: ITI IFM
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- van Wijnbergen, Sweder, 1987. "Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 691-706, October.
- van Wijnbergen, Sweder, 1984. "Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism," CEPR Discussion Papers 30, C.E.P.R. Discussion Papers.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mussa, Michael, 1974. "Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, and Intensity in the Short and Long Run," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1191-1203, Nov.-Dec..
- 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.
- Mussa, Michael, 1974. "A Monetary Approach to Balance-of-Payments Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(3), pages 333-51, August.
- Russell S. Boyer, 1977. "Commercial Policy under Alternative Exchange Rate Regimes," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 218-32, May.
- Jacob Frenkel & Assaf Razin, 1996.
"Fiscal Policies and Growth in the World Economy,"
MIT Press Books,
The MIT Press,
edition 3, volume 1, number 0262561042, January.
- Mansoorian, Arman & Mohsin, Mohammed, 2010. "On the employment, investment, and current account effects of trade liberalizations with durability in consumption," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 228-240, December.
- 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.
- Ikeda & S., 2000. "Tariffs, Time Preference, and the Current Account under Weakly Nonseparable Preferences," ISER Discussion Paper 0519, Institute of Social and Economic Research, Osaka University.
- Yoshiyasu Ono, 2006. "Protective Trade Policies 'Reduce' Employment: A Dynamic Optimization Approach," ISER Discussion Paper 0659, Institute of Social and Economic Research, Osaka University.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.