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Asset Markets, Tariffs, and Political Risk

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  • Alan C. Stockman
  • Harris Dellas

Abstract

The paper examines a simple model in which exogenous political risk creates uncertainty about tariffs. The model predicts a relation between consumption and tariffs that differs radically from that implied by models without asset markets or political risk. Given the probability distribution of tariffs, domestic consumption and utility (ex post) are lower in states of the world with a domestic tariff and no foreign tariff than with a foreign tariff and no domestic tariff.This conclusion emerges despite the fact that the opposite would be obtained in the absence of asset markets. So economists should not be surprised if observed relations between consumption and tariffs differ from the predictions of static theory in either time-series or cross-sections.

Suggested Citation

  • Alan C. Stockman & Harris Dellas, 1984. "Asset Markets, Tariffs, and Political Risk," NBER Working Papers 1413, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1413 Note: ITI IFM
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    References listed on IDEAS

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    1. Frank Milne, 1979. "Consumer Preferences, Linear Demand Functions and Aggregation in Competitive Asset Markets," Review of Economic Studies, Oxford University Press, vol. 46(3), pages 407-417.
    2. Helpman, Elhanan & Razin, Assaf, 1979. "A Theory of International Trade Under Uncertainty," Elsevier Monographs, Elsevier, edition 1, number 9780123396501 edited by Shell, Karl.
    3. Pomery, John, 1984. "Uncertainty in trade models," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 9, pages 419-465 Elsevier.
    4. Grauer, Frederick L. A. & Litzenberger, Robert H. & Stehle, Richard E., 1976. "Sharing rules and equilibrium in an international capital market under uncertainty," Journal of Financial Economics, Elsevier, vol. 3(3), pages 233-256, June.
    5. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-984, June.
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    Cited by:

    1. Sebastian Edwards, 1987. "Anticipated Protectionist Policies, Real Exchange Rates and the Current Account," UCLA Economics Working Papers 437, UCLA Department of Economics.
    2. Feeney, JoAnne & Hillman, Arye L., 2004. "Trade liberalization through asset markets," Journal of International Economics, Elsevier, vol. 64(1), pages 151-167, October.
    3. Alan C. Stockman, 1988. "Fiscal Policies and International Financial Markets," NBER Chapters,in: International Aspects of Fiscal Policies, pages 197-228 National Bureau of Economic Research, Inc.
    4. Francois, Joseph F. & Martin, Will, 2004. "Commercial policy variability, bindings, and market access," European Economic Review, Elsevier, vol. 48(3), pages 665-679, June.
    5. Michael R. Pakko, 1996. "Tariff risk and international borrowing with incomplete asset markets," Working Papers 1996-011, Federal Reserve Bank of St. Louis.
    6. Barari, Mahua, 1992. "Asset markets, stochastic policy and international trade," ISU General Staff Papers 1992010108000010972, Iowa State University, Department of Economics.
    7. Jensen, Richard & Thursby, Marie, 1990. "Tariffs with private information and reputation," Journal of International Economics, Elsevier, vol. 29(1-2), pages 43-67, August.
    8. Blanchard, Emily J., 2015. "A Shifting Mandate: International Ownership, Global Fragmentation, and a Case for Deeper Integration under the WTO," World Trade Review, Cambridge University Press, vol. 14(01), pages 87-99, January.
    9. Devereux, Michael B. & Min Lee, Khang, 1999. "Endogenous trade policy and the gains from international financial markets," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 35-59, February.
    10. Michael J. Dueker, 1995. "Tariffs and asset market structure: some basic comparative dynamics," Working Papers 1995-009, Federal Reserve Bank of St. Louis.
    11. Feeney, JoAnne & Hillman, Arye L., 1995. "Asset markets and individual trade policy preferences," Discussion Papers, Series II 282, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    12. Blanchard, Emily J., 2010. "Reevaluating the role of trade agreements: Does investment globalization make the WTO obsolete?," Journal of International Economics, Elsevier, vol. 82(1), pages 63-72, September.
    13. Blanchard, Emily J., 2014. "What global fragmentation means for the WTO: Article XXIV, behind-the-border concessions, and a new case for WTO limits on investment incentives," WTO Staff Working Papers ERSD-2014-03, World Trade Organization (WTO), Economic Research and Statistics Division.
    14. Stahl, Dale O. & Turunen-Red, Arja H., 1995. "Tariff games: Cooperation with random variation in political regimes," European Journal of Political Economy, Elsevier, vol. 11(2), pages 215-238, June.

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