Real exchange rate dynamics and trade liberalization: the case of multiple tariffs and unemployment

In this paper, a model to study a foreseen trade liberalization is developed. Compared with earlier dynamic models, the apparatus allows for multiple tariffs and unemployment - characteristics present in most less developed countries undertaking trade liberalization. Temporary tariffs on imported consumer and intermediate goods induce intratemporal and intertemporal substitution. Both types of tariffs raise the price of present to future consumption, but have different effects on the consumer price of non-traded relative to traded goods. The path of the real exchange rate, production, and employment in particular depend on the intertemporal elasticity of substitution, wage formation, and the initial relative size of different tariffs.