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Tariffs, Unemployment, and the Current Account: An Intertemporal Equilibrium Model

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  • Shouyong Shi

    ()

Abstract

This paper integrates labor market search into an intertemporal equilibrium model to analyze the dynamic macroeconomic effects of a tariff. The model captures the intuitive argument in the earlier literature that a permanent increase in the tariff improves the country's terms of trade, which tends to reduce the product wage and stimulates labor demand. However, the tariff also increases the price of the consumption goods bundle and reduces the marginal utility of wealth measured by imports. This consumption bundle effect raises the reservation wage and the product wage. When the consumption smoothing motive is realistically strong, the consumption bundle effect dominates the product wage effect and so tariffs reduce employment in both the short run and the long run.

Suggested Citation

  • Shouyong Shi, 1997. "Tariffs, Unemployment, and the Current Account: An Intertemporal Equilibrium Model," Working Papers 967, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:967
    as

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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_967.pdf
    File Function: First version 1997
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Tariffs; Unemployment; Search; Vacancy; Terms of trade;

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • F30 - International Economics - - International Finance - - - General

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