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Tariff Policy, Increasing Returns and Endogenous Fluctuations

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  • Chen, Yan
  • Zhang, Yan

Abstract

We study the effects of government tariff policy in a one-sector small open economy RBC model with a productive externality that generates social increasing returns to scale. Various forms of endogenous fluctuations, including stable 2-, 4-, 8-, and 15-cycles, quasiperiodic orbits and chaos can be identified in this model if we introduce a constant tariff or subsidy (applied to the imported production factor) into the laissez-faire economy that exhibits local indeterminacy. In a somewhat different model, Guo and Lansing (2002) show that a constant capital tax or subsidy can give rise to similar dynamics in a closed-economy one sector model with a productive externality. From this perspective, factor income taxes and tariffs are equivalent to generate endogenous fluctuations in those economies with social increasing returns to scale. We further show that in our model, the local determinacy can coexist with the global indeterminacy for a plausible range of tariff rates, which brings our attention to the use of local steady state analysis to make conclusions about the global dynamics of the nonlinear models.

Suggested Citation

  • Chen, Yan & Zhang, Yan, 2008. "Tariff Policy, Increasing Returns and Endogenous Fluctuations," MPRA Paper 10061, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:10061
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    File URL: https://mpra.ub.uni-muenchen.de/10061/1/MPRA_paper_10061.pdf
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    References listed on IDEAS

    as
    1. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    2. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
    3. Cazzavillan, Guido, 1996. "Public Spending, Endogenous Growth, and Endogenous Fluctuations," Journal of Economic Theory, Elsevier, vol. 71(2), pages 394-415, November.
    4. Tarek Coury & Yi Wen, 2007. "Global indeterminacy in locally determinate RBC models," Working Papers 2007-029, Federal Reserve Bank of St. Louis.
    5. Luís Aguiar-Conraria & Yi Wen, 2007. "Understanding the Large Negative Impact of Oil Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 925-944, June.
    6. Guo, Jang-Ting & Lansing, Kevin J., 2002. "Fiscal Policy, Increasing Returns, And Endogenous Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 6(05), pages 633-664, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Tariff Policy; Global Indeterminacy; Chaos;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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