Tariffs, Habit Persistence, and the Current Account
This paper emphasizes the importance of habit persistence in determining the effect of a permanent distortionary tariff on the current account. A distortionary tariff reduces real permanent income, requiring a fall in the standard of living. If the marginal utility of real consumption is strongly increasing in the habitual standard of living, then aggregate savings falls and the country runs a current account deficit. However, if the marginal utility of real consumption is not sufficiently strongly increasing (or is decreasing) in the habitual standards, then the tariff leads to a rise in savings and a current account surplus.
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Volume (Year): 26 (1993)
Issue (Month): 1 (February)
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