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Intergenerational and international welfare leakages of a tariff in a small open economy

  • Bettendorf, Leon J.H.
  • Heijdra, Ben J.

    (Groningen University)

A dynamic overlapping-generations model of a small open economy with imperfect competition in the goods market is constructed. A tariff increase reduces output and employment and leads to an appreciation of the real exchange rate both in the impact period and in the new steady state. The tariff shock has significant intergenerational distribution effects. Old existing generations gain less than both younger existing generations and future generations. Bond policy neutralizes the intergenerational inequities and allows the computation of first-best and second-best optimal tariff rates. The first-best tariff exploits national market power, but the second-best tariff contains a correction to account for the existence of a potentially suboptimal product subsidy.

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File URL: http://irs.ub.rug.nl/ppn/24106502X
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Paper provided by University of Groningen, CCSO Centre for Economic Research in its series CCSO Working Papers with number 199910.

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Date of creation: 1999
Date of revision:
Handle: RePEc:dgr:rugccs:199910
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