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Working Paper 1995-009A

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"Tariffs and Asset Market Structure: Some Basic Comparative Dynamics"
by Michael R. Pakko

Stockman and Dellas (1986) demonstrated that in the presence of complete international asset markets, the relative welfare implications of a small tariffare reversed from standard trade theory. This paper examines the robustness of that result to change in preference parameters and asset market structure. For nearly all values of substitution elasticity and risk aversion, the reversal remains. For very low risk aversion, however, equilibrium outcomes resemble Lerner or Metzler tariffparadoxes. In the latter case, the tariff-imposing country is made better-off. Implications of asset market incompleteness are considered in the form of a bonds-only regime, in which the inability to trade directly across states induces intertemporal substitution. A permanent tariff change effects relative consumption of the two countries as predicted in standard trade theory. A temporary tariff change results in a wealth redistribution, with the tariff-imposing country generally running a current account surplus.

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Category > International
Author > Michael R. Pakko