WEAKLY NONSEPARABLE PREFERENCES AND DISTORTIONARY TAXES IN A SMALL OPEN-ECONOMY

This paper examines the dynamic effects of distortionary taxes in a sm all open economy. The employed utility function implies both endogenou s rates of time preference and a tractable form of weak nonseparabilit y between consumption and leisure. Weak nonseparability induces novel long-run welfare and wealth effects of taxes and generates very differ ent current account movements. Endogenous rates of time preference fac ilitate the examination of a tax on international borrowing and lendin g.