Value of WTO Trade Agreements in a New Keynesian Model
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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. 15/37
Subject:
International trade agreements Keynesian economics Labor supply Tariffs Terms of trade Trade liberalization World Trade Organization
English
Publication Date:
February 25, 2015
ISBN/ISSN:
9781498372671/1018-5941
Stock No:
WPIEA2015037
Format:
Paper
Pages:
35
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