## Supply-Side Economics in an Integrated World Economy

_IMF Working Papers, November 1, 1993_

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**Canonical URL:** [Supply-Side Economics in an Integrated World Economy](https://www.imf.org/en/publications/wp/issues/2016/12/30/supply-side-economics-in-an-integrated-world-economy-1216)

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## Bibliographic details
- Authors: Linda L. Tesa, Enrique G. Mendoza
- Published: November 1, 1993
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451955095.001

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### Overview
- Examines macroeconomic effects of changes in tax and expenditure policies within the competitive equilibrium of a two-country, two-sector model of an integrated world economy.
- Governments finance purchases and net transfers of tradable and nontradable goods by imposing distortionary taxes on factor incomes and consumption.
- The model is parameterized and calibrated using data from large industrial economies, including estimates of effective tax rates.
- Numerical simulations estimate welfare costs associated with existing distortionary taxes and potential gains from more efficient use of these taxes.

### Methodology and calibration
- Framework: competitive equilibrium, two-country, two-sector integrated world economy model.
- Fiscal instruments modeled: distortionary taxes on factor incomes and consumption; government purchases and net transfers of tradable and nontradable goods.
- Calibration: uses data from large industrial economies and includes estimates of effective tax rates.
- Analysis tool: numerical simulations to quantify welfare costs and gains.

### Key findings
- Welfare gains from tax reforms favoring indirect taxation are substantial.
- The effects of permanent changes in expenditures depend on:
  - Their sectoral allocation across tradables and nontradables.
  - Whether they are debtor tax-financed.
- Trade in goods and assets is very sensitive to fiscal policy changes.
- Aggregate consumption patterns and welfare implications are not very sensitive to fiscal policy changes.

### Policy implications and recommendations
- Shifting tax structures toward more efficient use of taxation—particularly favoring indirect taxation—can yield substantial welfare gains.
- Fiscal policy design must consider sectoral allocation of expenditures (tradables vs nontradables) and financing modality (including debtor tax-financing) because these determine macroeconomic effects.
- Policymakers should account for high sensitivity of trade in goods and assets to fiscal changes even when aggregate consumption and welfare effects appear muted.

*Linda L. Tesa and Enrique G. Mendoza, "Supply-Side Economics in an Integrated World Economy", IMF Working Papers 1993, 081 (1993), November 1, 1993.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/supply-side-economics-in-an-integrated-world-economy-1216_