TARIFFS AND BALANCE-OF-PAYMENTS ADJUSTMENT: A PORTFOLIO APPROACH

This study analyzes the dynamics of the adjustment of the balance-of-payments within a two-asset model. Specifically, because of the typical neglect of the capital account in the traditional balance-of-payments approaches, we stress the respective changes of each of the two major accounts of the balance-of-payments, the capital account as well as the trade account, during the process of the adjustment.;We are not concerned here with the traditional real-trade analysis of the effect of a tariff, i.e. the impact of a tariff on the changes of the production and consumption structure of the economy arising from the establishment of price distortions. Instead, we focus on the monetary effect which a tariff has on the economy, that is, the effect on the balance-of-payments. We first found this issue interesting because of the striking fact that the effect of a tariff on the balance-of-payments itself can not be analyzed in a pure real-trade context by using our conventional analysis of trade theories. (Refer to Mussa (1974)). Besides, the imposition of a tariff is a good expository tool with which to analyze the theory of the balance-of-payments adjustments. This is because: (a)The imposition of a tariff has real as well as monetary implications, that is, it will change real variables as well as monetary variables which have influences on the balance-of-payments; (b)The portfolio imbalance caused by the imposition of a tariff could be of any form, and, as a consequence, the resulting dynamics may be quite different.;Therefore, in this dissertation, I approach the issue by focusing on how a tariff changes individual's preference regarding the composition of their asset holdings as well as the scale of these holdings. Both effects are important in determining the resulting changes of the balance-of-payments. The exposition of the subject is made more interesting by considering the effects of inflationary factors of short-run duration as well as the effects of changes of any real variables on the marginal portfolio decisions of wealth holders following the imposition of the tariff. Furthermore, we employ a unconventional variant of "the" portfolio approach in which the speed of portfolio adjustment is sluggish in achieving the optimal ratio as well as the desired scale rather than instantaneous as traditionally assumed by the "stock" approach. In order to derive the resulting steady state stock equilibrium, the comparative static change of the price level following the imposition of the tariff is also carefully drawn.;By establishing a mathematical model for the dynamic analysis, the time path of adjustments of our system is analyzed quantitatively as well as qualitatively. In particular, techniques of Laplace transform for solving differential equations and phase diagrams for illustrating the dynamics are employed in Chapter V. As a result, not only the qualitative predictions for the properties of the adjustment path made in Chapter IV are proved rigorously, but we also gain some insights which would not be feasible without establishing this more rigorous dynamic analysis.;This is accomplished by setting our analysis in the context of "portfolio approach" to the balance-of-payments. This approach emphasizes the portfolio composition adjustment as well as the portfolio scale adjustment (which is the sole driving force in a money-only model) following any disturbance in the framework of a multi-asset model.