infonet-economy

The article analyzes the dynamic effects of tariff liberalization on a small open economy. The primary focus is on nonmonotonic adjustment patterns of net lending such as overshooting or opposite short- and long run effects. When capital accumulation tilts wage income toward the future in the early transition periods, present generations perceive life-cycle type savings disincentives which create a transitory shortfall in savings. In the long run, wage profiles become flat again, and the savings deficiency vanishes. The transitory savings component may give rise to overshooting or opposite short- and long-run adjustment in the total stock of savings and net foreign assets.