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Metlzer’s Paradox and the Optimum Tariff in a Monetary Economy

Theodore Palivos and Chong Yip

Journal of Economic Integration, 1998, vol. 13, 216-231

Abstract: We augment the standard two country, two-commodity and two-factor trade model by allowing for money to exist as an additional asset. We find that it is possi - ble for an increase in the domestic tariff to worsen the terms of trade if the importable sector is severely distorted by the existence of money. Moreover, the Metzler condition is no longer both necessary and sufficient to rule out the Metzler paradox. Finally, we show that the conventional formula for the optimum tariff, derived in barter trade models, has a downward (upward) bias if money is more (less) efficacious in the importable sector. “In the real world there is no simple dividing line between trade and monetary issues.” Krugman and Obstfeld [1994], p. 8.

Keywords: Metlzer’s Paradox; the Optimum Tariff (search for similar items in EconPapers)
JEL-codes: E40 F11 (search for similar items in EconPapers)
Date: 1998
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