Tariffs, Saving and the Current Account
We investigate the effects of higher tariffs on the current account.Tariffs may increase or decrease investment depending on the capital intensity of the sector protected. We find that ther esponse of saving to tariffs issensitive to the modelling of saving behavior. In a model in which Consumers' discount rate varies endogenously (in the Uzawa preference form), saving fallswith higher tariffs. This result may, however, be reversed in the Blanchard-Yaarj type model in which consumers have uncertain lifetimes. We find that in both models the response of saving depends on a production distortion effect which changes steady-state income and an effect on steady-state expenditures.
(With Robert P. Flood) Published as "Exchange Rate Dynamics, Sticky Prices,and the Current Account", Journal of Money, Credit and Banking, Vol. 17,no. 3 (1985): 312-327.