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Tariffs and the Current Account: The Role of Initial Distortions

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  • Jonathan D. Ostry

Abstract

From an initial position of laissez-faire, temporary tariffs have been shown to improve the current account. However, if tariffs are initially positive (as in many actual economies), temporary tariffs will magnify an existing distortion and therefore lower real income during protectionist periods. Optimizing agents may wish to smooth the path of consumption relative to income by foreign borrowing. If the intertemporal elasticity of substitution is sufficiently low, temporary tariffs may actually worsen the current account.

Suggested Citation

  • Jonathan D. Ostry, 1990. "Tariffs and the Current Account: The Role of Initial Distortions," Canadian Journal of Economics, Canadian Economics Association, vol. 23(2), pages 348-356, May.
  • Handle: RePEc:cje:issued:v:23:y:1990:i:2:p:348-56
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    Cited by:

    1. Lone Christiansen & Alessandro Prati & Luca Antonio Ricci & Thierry Tressel, 2010. "External Balance in Low-Income Countries," NBER Chapters,in: NBER International Seminar on Macroeconomics 2009, pages 265-322 National Bureau of Economic Research, Inc.
    2. 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.
    3. 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.
    4. Arman Mansoorian & Simon Neaime, 2000. "Habits and Durability in Consumption, and the Effects of Tariff Protection," Open Economies Review, Springer, vol. 11(3), pages 195-204, July.

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