The Effects of Tariff Policy under the Fixed Exchange Rate Regime

Abstract

In this paper, New Open Economy Macroeconomics with micro-foundation was served as an analytical framework to explore the long-term effects of tariffs on various macroeconomic variables (e.g. consumption, output, price and terms of trade, and so on) while a country adopts a fixed exchange rate regime and with the presence of consumption home bias behavior. Through theoretical derivation and simulation analysis, we discovered that the correlation of domestic tariff rate with single variables for the long-term does not have monotonic nature, which shall depend on home (foreign) consumers’ consumptive preferences on imports and exports.