Trade Policy, Asset Markets and the Role of Tariff Structure for Time Consistency

Abstract

In a world of endowment uncertainty with asset markets where the policy active government has the discretionary power to revise previously announced tariff policy once asset positions are taken by the representative agents, we show that the tariff structure (i.e. the ratio in which export and import tariffs are combined) will matter for time consistent tariff policy ex post. This marks a departure from the standard deterministic fran1ework and entails interesting policy implications. As we demonstrate, there will exist multiple time consistent solutions, one for each tariff structure. Our simulation results indicate that for so1ne specific tariff structure and endowment structure, the introduction of asset markets may be welfare reducing if the government is unable to precon1mit, although there exists potential gains from trading in these markets. (Fl, F13)