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

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

    (Groningen University)

Abstract

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.

Suggested Citation

  • Bettendorf, Leon J.H. & Heijdra, Ben J., 1999. "Intergenerational and international welfare leakages of a tariff in a small open economy," Research Report 99C19, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  • Handle: RePEc:gro:rugsom:99c19
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    File URL: http://irs.ub.rug.nl/ppn/183931025
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    References listed on IDEAS

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    Cited by:

    1. Chung-Fu Lai, 2016. "Tariff, Consumption Home Bias and Macroeconomic Dynamics," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(8), pages 425-444, August.

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