IMF Working Papers

Value of WTO Trade Agreements in a New Keynesian Model

By Giovanni Ganelli, Juha Tervala

February 25, 2015

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Giovanni Ganelli, and Juha Tervala. Value of WTO Trade Agreements in a New Keynesian Model, (USA: International Monetary Fund, 2015) accessed November 8, 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

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.

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

Keywords: Consumption, Global, Labor supply, Price index, Tariff rate, Tariff reduction, Tariffs, Terms of trade, Terms of trade theory, Trade agreement, Trade agreements, Trade liberalization, Welfare gain, WP, WTO, WTO trade agreement

Publication Details

  • Pages:

    35

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2015/037

  • Stock No:

    WPIEA2015037

  • ISBN:

    9781498372671

  • ISSN:

    1018-5941

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