Working Paper: NBER ID: w2214
Authors: Sebastian Edwards
Abstract: In this paper a general equilibrium intertemporal model, with optimizing consumers and producers, is developed to analyze how the anticipation of future import tariffs affects real exchange rates and the current account. The model is completely real, and considers a small open economy that produces and consumes three goods each period. It is shown that, without imposing rigidities or adjustment costs, interesting paths for the equilibrium real exchange rate can be generated. In particular "equilibrium overshooting" can be observed. Precise conditions under which an anticipated future import tariff will worsen the current account in period 1 are derived. Several ways in which the model can be extended are also discussed in detail. The results obtained from this model have important implications for the analysis of real exchange rate misalignment and overvaluation.
Keywords: real exchange rates; current account; protectionist policies
JEL Codes: F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Anticipation of future import tariff (F17) | Worsening of current account in period 1 (F32) |
| Anticipation of future import tariff (F17) | Real appreciation in period 1 (N13) |
| Real appreciation in period 1 (N13) | Worsening of current account in period 1 (F32) |
| Anticipation of future import tariff (F17) | Depreciation in period 2 (D25) |
| Depreciation in period 2 (D25) | Improvement of current account (F32) |
| Anticipation of future import tariff (F17) | Intertemporal substitution effects (D15) |