Tariff-tax reform and exchange rate dynamics in a monetary economy |
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| Affiliation: | 1. Graduate School of Business, Deakin University, Australia;2. Department of Economics, Chinese University of Hong Kong, Shatin, Hong Kong;3. Department of Economics, Feng Chia University, Taichung, Taiwan;4. Institute of Economics, Academia Sinica, Taipei, Taiwan;5. Department of Economics, National Cheng Chi University, Taipei, Taiwan;6. Department of Economics, Fo Guang University, Yilan, Taiwan;1. School of Finance, Zhongnan University of Economics and Law, 182# Nanhu Avenue, East Lake High-tech Development Zone, Wuhan 430-073, P.R. China;2. Faculty of Economics, Kobe University, 2-1, Rokkodai, Nada-Ku, Kobe 657-8501, Japan;1. Department of Wealth and Taxation Management, National Kaohsiung University of Applied Sciences, No. 415, Chien-Kung Rd., Sanmin District, Kaohsiung City 80778, Taiwan;2. Department of Banking and Finance, National Chiayi University, No. 80, Sinmin Road, Chiayi City 60054, Taiwan;1. Department of Finance, Operations & Information Systems, Goodman School of Business, Brock University, St. Catharines, ON, Canada;2. Department of Finance, University of Sousse, Sousse, Tunisia;3. Department of Finance, John Molson School of Business, Concordia University, Montreal, QC, Canada;1. Borsa Istanbul, Research & Business Development Department, Emirgan, Istanbul 34467, Turkey;2. Georgetown University, McDonough School of Business, Northwest Washington, DC 20057, USA;3. Yildiz Technical University, Faculty of Economic and Administrative Sciences, Besiktas, Istanbul 34349, Turkey;4. Borsa Istanbul, Index & Data Department, Emirgan, Istanbul 34467, Turkey;1. HBS, University of Reading, Reading RG6 6UD, United Kingdom;2. CEM, WITS University, 1 Jan Smuts Avenue, P O Box 20, Wits 2050, Johannesburg, South Africa;3. COPPEAD-UFRJ, Cidade Universitária, 21941918 Rio de Janeiro, Brazil |
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| Abstract: | Using a dynamic monetary model, this paper analyzes the short- and long-run impacts of a tariff-tax reform on the economy, with attention being paid to short-run fluctuations in exchange rates. When a policy reform is announced and if the public believe that it will decrease excess demand, the domestic currency depreciates now to reflect its future depreciation. On the contrary, the domestic currency immediately appreciates if the public believe that it will increase excess demand. However, if there is a relatively small increase in excess demand, the public may mis-react in the exchange rate market by observing currency depreciation first and then appreciation toward the steady-state rate. |
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