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Tariff-Tax Reforms in Large Economies

Author/Editor: Ganelli, Giovanni | Tervala, Juha
Authorized for Distribution: May 1, 2012
Electronic Access: Free Full Text (PDF file size is 1,249KB)
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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.
 
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Series: Working Paper No. 12/139
Subject(s): Consumption taxes | Developing countries | Economic models | Tariff reforms | Tax increases | Tax reforms | Tax revenues | Terms of trade
Author's keyword(s): Tariff-tax reform; imperfect competition; trade negotiations; open economy macroeconomics; trade liberalization
 
English  
    Published:   May 1, 2012        
            Format:   Paper
    Stock No:   WPIEA2012139   Pages:   31
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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