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Tariff and Equilibrium Indeterminacy

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  • Zhang, Yan

Abstract

We study the effect of tariffs in a one-sector small open economy that imports oil. We find that (1) the model may exhibit local indeterminacy and sunspots when tariff rates are endogenously determined by a balanced-budget rule with a constant level of government expenditures (or lump-sum tansfers); and (2) indeterminacy disappears if the government finances endogenous public spending and transfers with fixed tariff rates. Under the first type of balanced budget formulation, we provide numerical (calibration) examples to illustate that the government shouldn't distort the oil price paid by firms with tariffs in order to avoid aggregate instability. Under the second type of balanced budget formulation, we prove that the economy exhibits equilibrium uniqueness, regardless of the existence of lump-sum transfers.

Suggested Citation

  • Zhang, Yan, 2009. "Tariff and Equilibrium Indeterminacy," MPRA Paper 13099, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:13099
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    File URL: https://mpra.ub.uni-muenchen.de/13099/1/MPRA_paper_13099.pdf
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    References listed on IDEAS

    as
    1. Aguiar-Conraria, Luís & Wen, Yi, 2008. "A Note On Oil Dependence And Economic Instability," Macroeconomic Dynamics, Cambridge University Press, vol. 12(05), pages 717-723, November.
    2. Leung, Charles Ka Yui, 1999. "Income Tax, Property Tax, and Tariff in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 7(3), pages 541-554, August.
    3. Weder, Mark, 2001. "Indeterminacy in a Small Open Economy Ramsey Growth Model," Journal of Economic Theory, Elsevier, vol. 98(2), pages 339-356, June.
    4. Mourmouras, Alex, 1991. "Infant governments and the fiscal role of tariffs, inflation, and reserve requirements : A welfare analysis," Journal of International Economics, Elsevier, vol. 31(3-4), pages 271-290, November.
    5. Finn, Mary G, 2000. "Perfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 400-416, August.
    6. Rotemberg, Julio J & Woodford, Michael, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 550-577, November.
    7. Meng, Qinglai & Velasco, Andres, 2004. "Market imperfections and the instability of open economies," Journal of International Economics, Elsevier, vol. 64(2), pages 503-519, December.
    8. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
    9. Michael Loewy, 2001. "Optimal tariffs, optimal taxes and economic development," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 13(4), pages 461-486.
    10. David M. Newbery, 2005. "Why Tax Energy? Towards a More Rational Policy," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-40.
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    More about this item

    Keywords

    Indeterminacy; Endogenous Tariff Rate; Small Open Economy; Balanced-budget Rule;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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