The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
In this paper a general equilibrium intertemporal model with optimizing consumers and producers is developed to analyze how the imposition of a temporary import tariff affects the path of real exchange rates and the current account. The model is completely real, and considers a small open economy that produces and consumes three goods each period. It is shown that, without imposing rigidities or adjustment costs, interesting paths for the equilibrium real exchange rate can be generated. In particular “equilibrium overshooting” can be observed. Precise conditions under which a temporary import tariff will worsen the current account in period 1 are derived. Several ways in which the model can be extended are discussed.