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Macroeconomic Effects of Tariffs: Insights from a New Open Economy Macroeconomics Model

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  • Stefan Reitz
  • Ulf D. Slopek

Abstract

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.

Suggested Citation

  • Stefan Reitz & Ulf D. Slopek, 2005. "Macroeconomic Effects of Tariffs: Insights from a New Open Economy Macroeconomics Model," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 141(II), pages 285-311, June.
    • Handle: RePEc:ses:arsjes:2005-ii-5
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    References listed on IDEAS

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    Cited by:

    1. Ganelli, Giovanni & Tervala, Juha, 2015. "Value of WTO trade agreements in a New Keynesian model," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 347-362.
    2. Wataru Johdo, 2019. "Tariffs, the exchange rate, and location," Economics Bulletin, AccessEcon, vol. 39(2), pages 741-750.
    3. Furceri, Davide & Hannan, Swarnali A. & Ostry, Jonathan D. & Rose, Andrew K., 2020. "Are tariffs bad for growth? Yes, say five decades of data from 150 countries," Journal of Policy Modeling, Elsevier, vol. 42(4), pages 850-859.

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    More about this item

    Keywords

    Imperfect Competition; Intertemporal Optimization; Protection;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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