Tariffs, non-traded goods and fiscal policy

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Abstract
This paper considers the effects of tariffs in a framework that explicitly accounts for the intertemporal nature of the current account. In particular, the paper shows how tariffs alter the domestic real interest rate, thereby influencing the optimal paths of consumption, saving, and the current account. By emphasizing the distinction between home goods and traded goods for a small open economy, the analysis highlights the important role of the real exchange rate in determining macroeconomic equilibrium. This paper also demonstrates the crucial importance of assumptions about the type of government fiscal policies accompanying a tariff.