Tariffs, the Real Exchange Rate and the Terms of Trade: On Two Popular Propositions in International Economics
AbstractIn this paper we investigate the relation between tariff changes, terms of trade changes and the equilibrium real exchange rate. For this purpose we use two models of a small open economy: (1) a three goods version of the Ricardo-Viner model; and (2) a three goods model with full intersectoral factor mobility. We show that, in general, it is not possible to know how the equilibrium real exchange rate will respond to these two disturbances. Moreover, we show that the traditional wisdom that establishes that a tariff hike will always result in a real appreciation, while a terms of trade worsening will generate an equilibrium real depreciation, is incorrect.
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Date of creation: Jun 1989
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- Edwards, Sebastian & van Wijnbergen, Sweder, 1987. "Tariffs, The Real Exchange Rate and the Terms of Trade: On Two Popular Propositions in International Economics," Oxford Economic Papers, Oxford University Press, vol. 39(3), pages 458-64, September.
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