Tariffs, Investment and the Current Account

Jorge E Roldos

International Economic Review, 1991, vol. 32, issue 1, 175-94

Abstract: A dynamic specific-factors model with adjustment costs of investment is used to study the impact of tariffs on the current account. A permanent increase in tariffs generates a current account deficit, as the import-competing sector spreads the increase of the capital stock over time. A temporary increase in tariffs has ambiguous effects. If the size and duration of the tariff are large enough, a strong response in investment could outweigh the increased savings and the current account deteriorates. For small and short-lived tariffs, the postponement of investment reinforces that of consumption, leading to a current account surplus. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1991
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