Tariff-Tax Reforms in Large Economies

May 1, 2012

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Juha Tervala, and Giovanni Ganelli. Tariff-Tax Reforms in Large Economies, (USA: International Monetary Fund, 2012) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies tariff-tax reforms in a calibrated two-region global New Keynesian model composed of a developing and an advanced region. In our baseline calibration, a revenue-neutral reform that lowers tariffs in developing countries can reduce domestic welfare. The reason is that the increase in developing countries welfare due to higher output is dominated by the welfare losses stemming from the deterioration of the terms of trade. On the other hand, the reform increases output and welfare in the advanced countries and in the world as a whole. The effects that we highlight have not been studied in previous contributions to the literature, which typically looks at tariff-tax reforms using a small open economy framework. Nominal rigidities have important implications for adjustment dynamics in our model. In the case of a "point-for-point" reform, for example, price stickiness implies that the international dynamics of output is reversed compared to a revenue neutral reform.

Subject: Consumption, Consumption taxes, International trade, Labor, Labor supply, National accounts, Tariffs, Taxes, Terms of trade

Keywords: Consumption, Consumption tax, Consumption taxes, Expenditure switching, Global, Imperfect competition, Labor supply, Liberalization effort, Open economy macroeconomics, Point-for-point reform, Reform fall, Tariff rate, Tariff reduction, Tariffs, Tariff-tax reform, Terms of trade, Terms-of-trade effect, Trade liberalization, Trade negotiations, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/139
Stock No:

WPIEA2012139
ISBN:

9781475503944
ISSN:

1018-5941

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