{
  "title": "External Shocks, the Real Exchange Rate, and Tax Policy",
  "publication": "IMF Working Papers, August 1, 1994",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/external-shocks-the-real-exchange-rate-and-tax-policy-1147",
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  "summary": "This paper uses a computable general equilibrium model of the economy of Trinidad and Tobago to assess the effects of trade liberalization and terms-of-trade shocks on the real exchange rate and the overall fiscal position of the government.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Uses a computable general equilibrium model of the economy of Trinidad and Tobago to assess effects of:\n  - trade liberalization; and\n  - terms-of-trade shocks.\n- Focuses on impacts on the real exchange rate and the overall fiscal position of the government.\n- Evaluates implications of alternative tax policies designed to offset the increase in the budget deficit of the central government resulting from both types of external sector shocks."
    },
    {
      "heading": "Model and methodology",
      "content": "- Computable general equilibrium (CGE) model calibrated to the economy of Trinidad and Tobago.\n- Scenarios analyzed include trade liberalization and terms-of-trade deterioration/shocks.\n- Model outputs used to trace effects on:\n  - real exchange rate;\n  - import volumes and importable goods;\n  - exportable goods and world price PWM; and\n  - government budget balance."
    },
    {
      "heading": "Key findings",
      "content": "- External sector shocks (trade liberalization and terms-of-trade shocks) materially affect the real exchange rate.\n- Both types of shocks lead to an increase in the budget deficit of the central government.\n- Cross-price effects and consumer demand responses are important channels mediating real exchange rate and trade volume adjustments.\n- Tariffs, value-added tax, and other tax instruments interact with trade reform to influence fiscal outcomes."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Alternative tax policies can be designed to offset the increase in the central government budget deficit caused by external shocks.\n- Tax policy design should consider:\n  - the structure of tariffs and their reform under trade liberalization;\n  - potential roles for value-added tax adjustments; and\n  - distributional and sectoral impacts via traded and nontraded goods channels.\n- Policymakers need to account for real exchange rate movements when choosing fiscal responses to external shocks."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subjects: Foreign exchange, Imports, International trade, Real exchange rates, Tariffs, Taxes, Trade liberalization, Value-added tax\n- Keywords: consumer demand, cross-price effect, exchange rate, exportable good, import volume, importable good, Imports, Real exchange rates, Tariffs, terms of trade, terms-of-trade deterioration, Trade liberalization, trade reform, traded good, Value-added tax, world price PWM, WP\n\nStephen Tokarick, \"External Shocks, the Real Exchange Rate, and Tax Policy\", IMF Working Papers 1994, 088 (1994).\n\n---\n\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/external-shocks-the-real-exchange-rate-and-tax-policy-1147"
    }
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    "Authors: Stephen Tokarick",
    "Published: August 1, 1994",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451851090.001",
    "Uses a computable general equilibrium model of the economy of Trinidad and Tobago to assess effects of:",
    "Focuses on impacts on the real exchange rate and the overall fiscal position of the government.",
    "Evaluates implications of alternative tax policies designed to offset the increase in the budget deficit of the central government resulting from both types of external sector shocks.",
    "Computable general equilibrium (CGE) model calibrated to the economy of Trinidad and Tobago.",
    "Scenarios analyzed include trade liberalization and terms-of-trade deterioration/shocks.",
    "Model outputs used to trace effects on:",
    "External sector shocks (trade liberalization and terms-of-trade shocks) materially affect the real exchange rate.",
    "Both types of shocks lead to an increase in the budget deficit of the central government.",
    "Cross-price effects and consumer demand responses are important channels mediating real exchange rate and trade volume adjustments.",
    "Tariffs, value-added tax, and other tax instruments interact with trade reform to influence fiscal outcomes.",
    "Alternative tax policies can be designed to offset the increase in the central government budget deficit caused by external shocks.",
    "Tax policy design should consider:",
    "Policymakers need to account for real exchange rate movements when choosing fiscal responses to external shocks.",
    "Subjects: Foreign exchange, Imports, International trade, Real exchange rates, Tariffs, Taxes, Trade liberalization, Value-added tax",
    "Keywords: consumer demand, cross-price effect, exchange rate, exportable good, import volume, importable good, Imports, Real exchange rates, Tariffs, terms of trade, terms-of-trade deterioration, Trade liberalization, trade reform, traded good, Value-added tax, world price PWM, WP"
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