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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1695:
Whom to Send to Doha? The Shortsighted Ones!

Mario Larch , and Wolfgang Lechthaler

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

Keywords: Bubbles, fiscal theory of the price level, collateral constraints, neutrality, transversality conditions; (follow links to similar papers)

JEL-Codes: F11,; F12,; F13; (follow links to similar papers)

25 pages, April 2011

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