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The Macroeconomic Effect of Trade Policy

Christopher Erceg, Andrea Prestipino and Andrea Raffo ()
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Andrea Prestipino: Federal Reserve Board

No 221, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We study the short-run macroeconomic e¤ects of trade policies that are equivalent in a frictionless economy, namely a uniform increase in import tari¤s and export subsidies (IX), an increase in value-added taxes accompanied by a payroll tax reduction (VP), and a border adjustment of corporate pro t taxes (BAT). Using a dynamic New Keynesian open-economy framework, we rst argue that IX tends to boost output and ination even under exible exchange rates, a result in sharp contrast with the conventional view of neutrality of these policies. We then provide (quite restrictive) conditions for exact neutrality of IX policies, whereby the real exchange rate appreciates enough to fully o¤set their competitive enhancing effects. Finally, we show that the equivalence among IX, VP,and BAT policies depends critically on assumptions about tax pass through. Under full pass through of taxes, IX and BAT are equivalent but VP is not. With su¢ cient price rigidities, VP is contractionary rather than expansionary.

Date: 2018
New Economics Papers: this item is included in nep-dge and nep-opm
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