Metlzer 's Paradox and the Optimum Tariff in a Monetary Economy

Palivos, Theodore; Yip, Chong K.; Chong, Terence T. L.

doi:1998.13.2.216

Journal of Economic Integration 1998 June;13(2) :216-231.
DOI: https://doi.org/10.11130/jei.1998.13.2.216

Metlzer 's Paradox and the Optimum Tariff in a Monetary Economy

Theodore Palivos, Chong K. Yip, Terence T. L. Chong

Tilburg University & Louisiana State University
Chinese University of Hong Kong

ABSTRACT

We augment the standard two country, two-commodity and two-factor trade model by allowing for money to exist as an additional asset. We find that it is possible for an increase in the domestic tariff to worsen the terms of trade if the importable sector is severely distorted by the existence of money. Moreover, the Metzler condition is no longer both necessary and sufficient to rule out the Metzler paradox. Finally, we show that the conventional formula for the optimum tariff, derived in barter trade models, has a downward (upward) bias if money is more (less) efficacious in the importable sector. "In the real world there is no simple dividing line between trade and monetary issues." Krugman and Obstfeld [1994], p. 8. (JEL Classification: F11, E40)

REFERENCE

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2.	Kemp, M.C. [1990], "The Gains from Trade for a Monetary Economy," Kobe Economic & Business Review, 35th Annual Report; pp. 27-30.

3.	Batra, R.N. & R. Ramachandran [1980], "Tariffs, the Terms of Trade and Domestic Prices in a Monetary Economy," Review of Economic Studies 47; pp. 456-463.