Fiscal Policy and Trade Margins: An Educational Channel

Roberto Guadarrama-Baena and Povilas Lastauskas

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper combines current literature on the heterogeneous firms in international trade with the public economics of fiscal policy. We study the nexus between the intensive and extensive margins of trade, and their relationship with fiscal policy. When taxes are collected through the fixed per-period production payments, borne by all active firms, they impact firm partitioning and exporting decisions, but are nevertheless left unmodelled and treated as a pure loss in the literature. Instead, we show theoretically how such taxes can be channelled back into an open economy through spending on education (thereby affecting workers’ skill distribution), and contrast the result with the standard trade liberalisation exercise and a wasteful channel, which are prevalent in the literature. We estimate the model’s predictions using a novel data set covering 40 countries from 1995 to 2011. Employing the instrumental-variable panel techniques, we find support to our main testable predictions: fixed production taxes, used as the source to fund education, create an educational channel on the aggregate expenditure and the extensive margin of trade. A decrease in expenditure and an increase in the extensive margin are both amplified once an educational channel is allowed for.

Keywords: Fiscal policy; intensive and extensive margins of international trade; education; skill distribution (search for similar items in EconPapers)
JEL-codes: C26 E62 F12 F16 I28 (search for similar items in EconPapers)
Date: 2015-11-12
New Economics Papers: this item is included in nep-int and nep-mac
Note: pl312
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1533

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