The Macroeconomic Effects of Tariffs Through the Exchange Rate and Migration
The Macroeconomic Effects of Tariffs Through the Exchange Rate and Migration

Summary/Abstract: This paper uses a new open-economy macroeconomic model that considers worker migration to analyze the effects of tariffs. The model shows that an increase in tariffs in the domestic country leads to a higher level of relative consumption in that country when the elasticity of substitution between the two goods is low or the rate of time preference is small. However, when the elasticity of substitution between the two goods is high, the relative consumption level in the domestic country is unaffected by the tariff increase. Additionally, the paper shows that a tariff increase in the domestic country appreciates the exchange rate if the rate of time preference is relatively small. Furthermore, the paper shows that, when the rate of time preference is relatively small, an increase in tariffs causes workers to migrate from the foreign country to the domestic country in both the short and long runs. Finally, the paper shows that an increase in a country's tariff rate worsens world welfare because it causes market distortions.

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