Macroeconomic impact of a tariff reduction: a three-gap analysis with model simulations
1997
Yap, J.T.
Using a three-gap model it can be shown that a reduction in the tariff level will lead to an unambigous decline in the GDP [Gross Domestic Product] growth rate if it results in a reduction of the surplus of the government's primary account. Empirical results using Philippine data show that this condition is satisfied. Since foreign direct investment (FDI) is crucial in breaking the economic gridlock brought about by capital inflows, policymakers should determine whether greater macroeconomic instability that results from larger fiscal and trade deficits can be offset by the more liberalized economic environment in attracting FDI. It may also be the case, however, that greater macroeconomic instability will eventually countervail any benefits from microeconomic reform
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