Working Paper

Tariff risk and international borrowing with incomplete asset markets.

Abstract: When residents of two countries have access to complete contingent claims markets, the welfare effects of changes in tariffs are opposite to those found in static trade theory. This paper demonstrates that a much simpler asset market structure can be sufficient to generate such a result. In the context of a two period model with asset trade restricted to simple bonds, I decompose wealth and substitution effects that underlying the impact oftariff changes on consumption and the current account. Use of this relatively simple model helps to provide intuitive insight and facilitates the use of an illustrative diagrammatic framework.

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 1996

Number: 1996-011