Tariffs and exchange rate dynamics redux

This paper builds a two-country intertemporal macroeconomic model similar to one developed recently by Obstfeld and Rogoff. Imperfectly competitive producer/consumers maximize an intertemporal utility function with consumption, real money balances and output as arguments. We use the framework to examine both the short-run and steady-state effects of the imposition of a tariff in one of the countries. This results in a fall in the tariff imposer's output in both the steady state and in the short run, A small tariff may make a country worse off (contrary to the usual result under perfect competition). Spillover effects are also considered. (C) 2000 Elsevier Science Ltd. All rights reserved. JEL classification: F13; F41.