Tariffs and the Current Account: The Role of Initial Distortions
Jonathan Ostry ()
Canadian Journal of Economics, 1990, vol. 23, issue 2, 348-56
From an initial position of laissez-faire, temporary tariffs have been shown to improve the current account. However, if tariffs are initially positive (as in many actual economies), temporary tariffs will magnify an existing distortion and therefore lower real income during protectionist periods. Optimizing agents may wish to smooth the path of consumption relative to income by foreign borrowing. If the intertemporal elasticity of substitution is sufficiently low, temporary tariffs may actually worsen the current account.
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