Macroeconomic Effects of Tariffs: Insights from a New Open Economy Macroeconomics Model
In this paper a two country new open economy macroeconomics model is applied to analyze both the short-run and the steady state macroeconomic effects of protection. Similar to the traditional Mundell Fleming approach we find that the imposition of a permanent tariff entails a demand diversion effect and a contrarian terms of trade effect, that switches world demand away from domestic towards foreign output. In our case however, the negative terms of trade effect on domestic output unambiguously outweighs the positive effect of demand diversion. Moreover, our analysis reveals that protection raises domestic welfare in the short run, while lowering foreign as well as global welfare. The positive effect on domestic welfare is due to a terms of trade improvement, less labor effort, and consumption exceeding real income, whereas foreigners suffer from the opposite.
Volume (Year): 141 (2005)
Issue (Month): II (June)
|Contact details of provider:|| Postal: |
Phone: +41 (0)44 631 32 34
Fax: +41 (0)44 631 39 01
Web page: http://www.sjes.ch
More information through EDIRC
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.:
- Krugman, Paul, 1982. "The macroeconomics of protection with a floating exchange rate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 16(1), pages 141-182, January.
- Mark J. Melitz, 2002.
"The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,"
NBER Working Papers
8881, National Bureau of Economic Research, Inc.
- Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
- Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
- Lane, Philip R., 2001.
"The new open economy macroeconomics: a survey,"
Journal of International Economics,
Elsevier, vol. 54(2), pages 235-266, August.
- James E. Anderson & Eric van Wincoop, 2004.
NBER Working Papers
10480, National Bureau of Economic Research, Inc.
- Philippe BACCHETTA & Eric VAN WINCOOP, 1999.
"Does Exchange Rate Stability Increase Trade and Welfare ?,"
Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP)
9917, Université de Lausanne, Faculté des HEC, DEEP.
- Eric van Wincoop & Philippe Bacchetta, 2000. "Does Exchange-Rate Stability Increase Trade and Welfare?," American Economic Review, American Economic Association, vol. 90(5), pages 1093-1109, December.
- repec:rus:hseeco:122439 is not listed on IDEAS
- John Fender & Chong K. Yip, 1998.
"Tariffs and Exchange Rate Dynamics Redux,"
Departmental Working Papers
_105, Chinese University of Hong Kong, Department of Economics.
- Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
- Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp..
- Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-20, September.
- Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
- Eichengreen, Barry J., 1981. "A dynamic model of tariffs, output and employment under flexible exchange rates," Journal of International Economics, Elsevier, vol. 11(3), pages 341-359, August.
When requesting a correction, please mention this item's handle: RePEc:ses:arsjes:2005-ii-5. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Steiner)
If references are entirely missing, you can add them using this form.