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Tariff-Tax Reforms in Large Economies
Author:
Juha Tervalanull

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Mr. Giovanni Ganelli
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Series:
IMF Working Papers
Volume/Issue:
Volume 2012: Issue 139
Language:
English
Publication Date:
01 May 2012
DOI:
https://doi.org/10.5089/9781475503944.001
ISBN:
9781475503944
ISSN:
1018-5941
Pages:
32
Keywords:
WP; expenditure switching; Tariff-tax reform; imperfect competition; trade negotiations; open economy macroeconomics; trade liberalization; tariff rate; consumption tax; reform fall; point-for-point reform; terms-of-trade effect; tariff reduction; liberalization effort; Consumption taxes; Tariffs; Consumption; Terms of trade; Labor supply; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper studies tariff-tax reforms in a calibrated two-region global New Keynesian model composed of a developing and an advanced region. In our baseline calibration, a revenue-neutral reform that lowers tariffs in developing countries can reduce domestic welfare. The reason is that the increase in developing countries welfare due to higher output is dominated by the welfare losses stemming from the deterioration of the terms of trade. On the other hand, the reform increases output and welfare in the advanced countries and in the world as a whole. The effects that we highlight have not been studied in previous contributions to the literature, which typically looks at tariff-tax reforms using a small open economy framework. Nominal rigidities have important implications for adjustment dynamics in our model. In the case of a "point-for-point" reform, for example, price stickiness implies that the international dynamics of output is reversed compared to a revenue neutral reform.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2012: Issue 139