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Macroeconomic Impact of a Tariff Reduction: A Three-Gap Analysis with Model Simulations

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  • Yap, Josef T.

Abstract

Using a three-gap model, it can be shown that a reduction in the tariff level will lead to an unambiguous decline in the GDP growth rate if it results in a reduction of the surplus of the government’s primary account. Empirical results using Philippine data show that this condition is satisfied. Since FDI is crucial in breaking the economic gridlock brought about by capital inflows, policymakers should determine whether greater macroeconomic instability that results from larger fiscal and trade deficits can be offset by the more liberalized economic environment in attracting FDI. It may also be the case, however, that the greater macroeconomic instability will eventually countervail any benefits from microeconomic reform.

Suggested Citation

  • Yap, Josef T., 1997. "Macroeconomic Impact of a Tariff Reduction: A Three-Gap Analysis with Model Simulations," Philippine Journal of Development JPD 1997 Vol. XXIV No.1-b, Philippine Institute for Development Studies.
    • Handle: RePEc:phd:pjdevt:jpd_1997_vol__xxiv_no_1-b
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    References listed on IDEAS

    as
    1. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April.
    2. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
    3. Taylor, Lance, 1994. "Gap models," Journal of Development Economics, Elsevier, vol. 45(1), pages 17-34, October.
    4. Mr. David Bevan, 1995. "Fiscal Implications of Trade Liberalization," IMF Working Papers 1995/050, International Monetary Fund.
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