Do tariffs affect the balance of payments? Evidence from mean group and pooled mean group estimation

This study investigates the impact of tariffs on balance of payments (BOP), focusing on current, capital, and financial accounts. Using the mean group and pooled mean group estimator to address potential endogeneity and heterogeneity, the findings show tariffs significantly improve the current accounts while their effect on the capital and financial accounts is mixed. Incorporating foreign direct investment (FDI) as moderator, found FDI strengthens the impact of trade-related balances but weakens their influence on capital inflows. These findings highlight that tariffs shape external stability mainly through trade and FDI interaction channels. The study contributes to understanding how trade policy interacts with global investment flows to influence macro-financial stability.