Tariff and Equilibrium Indeterminacy

Yan Zhang

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Indeterminacy; Endogenous Tariff Rate; Small Open Economy; Balanced-budget Rule (search for similar items in EconPapers)
JEL-codes: F41 Q43 (search for similar items in EconPapers)
Date: 2009-02-01
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/13099/1/MPRA_paper_13099.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:13099

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().