noteworthy. First, the revenue-redistribution scheme adopted by the government will affect the magnitude, and possibly even the sign of the comparative static results. If the tariff proceeds are redistributed to consumers, then the only effect of the tariff is a pure substitution effect in favor of the domestic good, so that the output effect of a tariff is necessarily expansionary. At the same time, the tradebalanceeffect will be lower (but still positive).
Second, the assumption that the exchange rate is fixed is crucial for the comparative static results. Suppose
Philipp Engler, Mr. Giovanni Ganelli, Juha Tervala, and Simon Voigts
Using a DSGE model calibrated to the euro area, we analyze the international effects of a fiscal devaluation (FD) implemented as a revenue-neutral shift from employer's social contributions to the Value Added Tax. We find that a FD in ‘Southern European countries’ has a strong positive effect on output, but mild effects on the trade balance and the real exchange rate. Since the benefits of a FD are small relative to the divergence in competitiveness, it is best addressed through structural reforms.
The world model of merchandise trade as presently specified1 focuses primarily on the impact of levels of economic activity in the industrial countries on their foreign trade balances, although the effects of changes in relative prices are also considered. Raw material and fuel imports and transactions in manufactured goods are especially important in the trade of these countries, and the determinants of these flows, as well as those of agricultural goods, are quite distinct. As a result, the model distinguishes between these four types of commodity flows but pays particular attention to the determinants of trade in fuels, raw materials, and manufactured goods.
Mr. Andrew Feltenstein, Mr. Morris Goldstein, and Ms. Susan M Schadler
In a world of significant exchange rate variability, the problem of evaluating the impact of exchange rate changes on a country’s trade balance carries immediate operational relevance. Even those countries that continue to peg the value of their currencies find that frequent changes in the exchange rates of floating currencies affect the outlook for a substantial segment of their own exports and imports. For example, in 1977, countries that pegged their currencies to the U. S. dollar, the pound sterling, the French franc, the SDR, or some other currency composite still conducted roughly 40 per cent of their export trade with countries that either allowed their currencies to vary independently or did not fix their currencies to the same peg. On a global basis, trade between countries that fixed the value of their currencies in relation to one another accounted for less than one fifth of world exports in 1977.
The paper examines how the evolution from a classical centrally planned economy to a more market-oriented system will enhance the linkage between the exchange rate and the domestic price level. However, during the transition--as the economy continues to be predominantly state-owned, the inherited production structure is only gradually modified, capital and labor mobility are still relatively low and financial discipline is less-than-complete--the elasticity of the domestic price level with respect to a change in the exchange rate, or, to a change in world market prices, may still be lower than in an otherwise comparable market economy.
This paper reviews the main features of market-oriented foreign trade reforms in planned economies. It considers reform initiatives aimed at expanding enterprise autonomy and breaking up the state monopoly of foreign trade, modifying the exchange rate system, and reforming the domestic price structure and ultimately the price system. The study emphasizes that the success of foreign trade reform, and therefore of a trade policy aimed at fundamental integration of planned economies into the world economic system, ultimately depends as well on the successful implementation of compatible reforms in the domestic economy as a whole.
We analyze the welfare multipliers of public spending (the consumption equivalent change in welfare for one dollar change in public spending) in a DSGE model. The welfare multipliers of public infrastructure investment are positive if infrastructure is sufficiently effective. When the medium-term output multipliers are consistent with the empirical estimates (1-1.4), the welfare multiplier is 0.8. That is, a dollar spent by the government for investment raises domestic welfare by equivalent of 0.8 dollars of private consumption. This suggests that the welfare gains of public infrastructure investment, if chosen wisely, may be substantial.
International Monetary Fund. External Relations Dept.
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