Value of WTO Trade Agreements in a New Keynesian Model

Author/Editor:

Giovanni Ganelli ; Juha Tervala

Publication Date:

February 25, 2015

Electronic Access:

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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:

We revisit the question of the quantitative benefits of WTO trade agreements in a setup that is non-standard from the traditional trade policy point of view. We show that in a New Keynesian model, unilateral trade liberalization reduces welfare due to terms-of-trade deterioration, creating an incentive for a trade agreement. For realistic parameter values, the value of an agreement, which cuts tariffs by one percentage point, is 0.5% to 2% of consumption, much larger than in trade models. The intuition for this result hinges on some New Keynesian features of our framework, such as imperfect competition and endogenous labor supply.

Series:

Working Paper No. 2015/037

Subject:

Consumption International trade Labor Labor supply National accounts Tariffs Taxes Trade agreements Trade liberalization

English

Publication Date:

February 25, 2015

ISBN/ISSN:

9781498372671/1018-5941

Stock No:

WPIEA2015037

Pages:

35

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