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Anticipated Protectionist Policies, Real Exchange Rates and the Current Account

  • Sebastian Edwards

    (UCLA)

In this paper a general equilibrium intertemporal model, with optimizing consumers and producers, is developed to analyze how the anticipation of future import tariffs affects real exchange rates and the current account. The model is completely real, and considers a small open economy that produces and consumes three goods each period. It is shown that, without imposing rigidities or adjustment costs, interesting paths for the equilibrium real exchange rate can be generated. In particular "equilibrium overshooting" can be observed. Precise conditions under which an anticipated future import tariff will worsen the current account in period 1 are derived. Several ways in which the model can be extended are also discussed in detail. The results obtained from this model have important implications for the analysis of real exchange rate misalignment and overvaluation.

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File URL: http://www.econ.ucla.edu/workingpapers/wp437.pdf
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Paper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 437.

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Date of creation: 01 Feb 1987
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Handle: RePEc:cla:uclawp:437
Contact details of provider: Web page: http://www.econ.ucla.edu/

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  1. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
  2. Alan C. Stockman & Harris Dellas, 1987. "Asset Markets, Tariffs, and Political Risk," NBER Working Papers 1413, National Bureau of Economic Research, Inc.
  3. Jacob A. Frenkel & Assaf Razin, 1986. "Fiscal Policies and Real Exchange Rates in the World Economy," NBER Working Papers 2065, National Bureau of Economic Research, Inc.
  4. Obstfeld, Maurice, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 251-70, May.
  5. Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
  6. repec:cup:cbooks:9780521299695 is not listed on IDEAS
  7. Aizenman, Joshua, 1985. "Tariff liberalization policy and financial restrictions," Journal of International Economics, Elsevier, vol. 19(3-4), pages 241-255, November.
  8. Edwards, Sebastian & van Wijnbergen, Sweder, 1986. "The Welfare Effects of Trade and Capital Market Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 141-48, February.
  9. Torsten Persson & Lars E.O. Svensson, 1983. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," NBER Working Papers 1129, National Bureau of Economic Research, Inc.
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