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Tariffs and asset market structure: some basic comparative dynamics

  • Michael Dueker

Stockman and Dellas (1986) demonstrated that in the presence of complete international asset markets, the relative welfare implications of a small tariffare reversed from standard trade theory. This paper examines the robustness of that result to change in preference parameters and asset market structure. For nearly all values of substitution elasticity and risk aversion, the reversal remains. For very low risk aversion, however, equilibrium outcomes resemble Lerner or Metzler tariffparadoxes. In the latter case, the tariff-imposing country is made better-off. Implications of asset market incompleteness are considered in the form of a bonds-only regime, in which the inability to trade directly across states induces intertemporal substitution. A permanent tariff change effects relative consumption of the two countries as predicted in standard trade theory. A temporary tariff change results in a wealth redistribution, with the tariff-imposing country generally running a current account surplus.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1995-009.

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Date of creation: 1995
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Handle: RePEc:fip:fedlwp:1995-009
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  1. Persson, Torsten & Svensson, Lars E O, 1985. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 43-65, February.
  2. Jonathan D. Ostry, 1988. "The Balance of Trade, Terms of Trade, and Real Exchange Rate: An Intertemporal Optimizing Framework," IMF Staff Papers, Palgrave Macmillan, vol. 35(4), pages 541-573, December.
  3. Baxter, M. & Crucini, M., 1991. "Business Cycles and the Asset Structure of Foreign Trade," RCER Working Papers 316, University of Rochester - Center for Economic Research (RCER).
  4. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
  5. Jones, Ronald W, 1969. "Tariffs and Trade in General Equilibrium: Comment," American Economic Review, American Economic Association, vol. 59(3), pages 418-24, June.
  6. Ostry, Jonathan D. & Rose, Andrew K., 1992. "An empirical evaluation of the macroeconomic effects of tarrifs," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 63-79, February.
  7. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
  8. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  9. Feeney, JoAnne & Jones, Ronald W, 1994. "Risk Aversion and International Markets: Does Asset Trade Smooth Real Income?," Review of International Economics, Wiley Blackwell, vol. 2(1), pages 13-26, February.
  10. David K. Backus & Patrick Kehoe & Finn Kydland, 1992. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve Revisited," Working Papers 92-6, New York University, Leonard N. Stern School of Business, Department of Economics.
  11. Sadorsky, Perry, 1994. "The Behavior of U.S. Tariff Rates: Comment," American Economic Review, American Economic Association, vol. 84(4), pages 1097-1103, September.
  12. David K. Backus, 1992. "Interpreting Comovements in the Trade Balance and the Terms of Trade," Working Papers 92-4, New York University, Leonard N. Stern School of Business, Department of Economics.
  13. Stockman, Alan C. & Dellas, Harris, 1986. "Asset markets, tariffs, and political risk," Journal of International Economics, Elsevier, vol. 21(3-4), pages 199-213, November.
  14. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  15. Lloyd A. Metzler, 1949. "Tariffs, the Terms of Trade, and the Distribution of National Income," Journal of Political Economy, University of Chicago Press, vol. 57, pages 1.
  16. Jones, Ronald W, 1985. "Income Effects and Paradoxes in the Theory of International Trade," Economic Journal, Royal Economic Society, vol. 95(378), pages 330-44, June.
  17. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
  18. Barari, Mahua & Lapan, Harvey E., 1993. "Stochastic Trade Policy with Asset Markets: The Role of Tariff Structure," Staff General Research Papers 10042, Iowa State University, Department of Economics.
  19. Sebastian Edwards, 1988. "Temporary Terms of Trade Disturbances, The Real Exchange Rate and the Current Account," NBER Working Papers 2629, National Bureau of Economic Research, Inc.
  20. Hagiwara, May, 1994. "Volatility in the terms of trade with non-identical preferences," Journal of International Money and Finance, Elsevier, vol. 13(3), pages 319-341, June.
  21. Cole, Harold, 1988. "Financial Structure and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 237-59, May.
  22. 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.
  23. 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.
  24. Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
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