Consumption Taxes and International Competitiveness in a Keynesian World

Reto Schleiniger

No 42, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: The present paper analyzes the consequences of a consumption tax reform for the export sector. In particular, it offers an explanation why exporters support such a reform although economic theory basically predicts trade neutrality. To this purpose, the basic neoclassical model is replaced with two Keynesian assumptions, i.e. sticky wages and absence of perfect foresight. It is derived that in both cases the export sector expands in the short run. However, with sticky wages, this is only possible if, at the same time, the central bank fixes the exchange rate. In the absence of perfect foresight, on the other hand, the additional condition for the tax reform to increase exports is that the government balances its budget in each period.

Keywords: Consumption tax reform; international competitiveness; Keynesian assumptions (search for similar items in EconPapers)
JEL-codes: D50 F10 H22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-pbe and nep-pub
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