IMF Working Papers

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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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