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Tariff risk and international borrowing with incomplete asset markets

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  • Michael R. Pakko

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.

Suggested Citation

  • Michael R. Pakko, 1996. "Tariff risk and international borrowing with incomplete asset markets," Working Papers 1996-011, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:1996-011
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    References listed on IDEAS

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    Keywords

    International trade; Tariff;

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