Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/45888
Authors: 
Larch, Mario
Lechthaler, Wolfgang
Year of Publication: 
2011
Series/Report no.: 
Kiel Working Paper 1695
Abstract: 
Why are empirically observed tariffs so much lower than theoretically calculated Nash-equilibrium tariffs? We argue that this gap can be narrowed by using a dynamic model instead of a static model. This approach has two advantages. (i) It allows us to take account of the transitional process after a change in tariffs. (ii) It allows us to take account of the shortsightedness of policy makers. We show that Nash-equilibrium tariffs based on a dynamic trade model are lower than Nash-equilibrium tariffs based on a static model. We also show that shortsighted politicians tend to set lower tariffs than politicians with a long planning horizon.
Subjects: 
Bubbles
fiscal theory of the price level
collateral constraints
neutrality
transversality conditions
JEL: 
F11
F12
F13
Document Type: 
Working Paper

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