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Savings Promotion, Investment Promotion, and International Competitiveness

In: Trade Policies for International Competitiveness

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  • Lawrence H. Goulder
  • Barry Eichengreen

Abstract

In an open economy, savings- and investment-promoting policies may have very different effects on the capital account and on the viability of export-oriented and import-competing industries. The nature of the effects is often ambiguous in analytical models. This paper employs a simulation model that combines a detailed treatment of industry interactions, attention to adjustment dynamics, and an integrated treatment of current and capital account transactions to investigate these effects in both the short and long run. We focus on the different effects of savings- and investment-promoting U.S. tax policies on the viability of U.S. export industries. We compare results under the assumption of no international capital mobility (and no international asset transactions) with those under the assumption of full international mobility (which assumes no barriers to or costs of such transactions). Within the case of capital mobility, we consider the importance of the degree of international asset substitutability -- the extent to which individuals respond to differences in anticipated rates of return by altering their portfolios. Simulation results show that the impacts on export industries differ fundamentally depending on the degree of international capital mobility. In the absence of such mobility, savings- and investment- promoting policies have similar effects on U.S. export industries, with insubstantial effects in the short run and larger. beneficial long-run effects that reflect increases in the productiveness of the U.S. economy. Once international capital mobility is accounted for, however, the effects of the two policies differ from one another in both the short and long run. Subsidizing saving helps U.S. export industries initially but hurts them over the longer term. The reverse is true for a policy that subsidizes investment. These differences, which are robust across a range of model specifications and parameter assumptions, stem from the very different implica

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Bibliographic Info

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This chapter was published in:

  • Robert C. Feenstra, 1989. "Trade Policies for International Competitiveness," NBER Books, National Bureau of Economic Research, Inc, number feen89-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 6175.

    Handle: RePEc:nbr:nberch:6175

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    1. Darrell Duffie & William Zame, 1988. "The Consumption-Based Capital Asset Pricing Model," Discussion Papers 88-10, University of Copenhagen. Department of Economics.
    2. Pentti J.K. Kouri, 1978. "Balance of Payments and the Foreign Exchange Market: A Dynamic Partial Equilibrium Model," Cowles Foundation Discussion Papers 510, Cowles Foundation for Research in Economics, Yale University.
    3. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-85, July.
    4. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Mutti, John & Grubert, Harry, 1985. "The taxation of capital income in an open economy: the importance of resident-nonresident tax treatment," Journal of Public Economics, Elsevier, vol. 27(3), pages 291-309, August.
    6. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    7. Goulder, Lawrence H. & Summers, Lawrence H., 1989. "Tax policy, asset prices, and growth : A general equilibrium analysis," Journal of Public Economics, Elsevier, vol. 38(3), pages 265-296, April.
    8. Rachel McCulloch & Maurice R. Greenberg & Lionel H. Olmer, 1988. "International Competition in Services," NBER Chapters, in: The United States in the World Economy, pages 367-422 National Bureau of Economic Research, Inc.
    9. Warwick J. McKibbin & Jeffrey Sachs, 1986. "Coordination of Monetary and Fiscal Policies in the OECD," NBER Working Papers 1800, National Bureau of Economic Research, Inc.
    10. Alberto Giovannini, 1987. "International Capital Mobility and Tax Evasion," NBER Working Papers 2460, National Bureau of Economic Research, Inc.
    11. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-84, June.
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    Cited by:
    1. Lawrence H. Goulder and Barry Eichengreen., 1989. "Trade Liberalization in General Equilibrium: Intertemporal and Inter-Industry Effects," Economics Working Papers 89-110, University of California at Berkeley.
    2. Warwick J McKibbin & Robert Shackleton & Peter J Wilcoxen, 1998. "The Potential Effects of International Carbon Emissions Permit Trading," Departmental Working Papers 1998-09, The Australian National University, Arndt-Corden Department of Economics.
    3. Bruce F. Parsell & Alan A. Powell & Peter J. Wilcoxen, 1989. "The Reconciliation of Computable General Equilibrium and Macroeconomic Modelling: Grounds for Hope?," Centre of Policy Studies/IMPACT Centre Working Papers ip-44, Monash University, Centre of Policy Studies/IMPACT Centre.
    4. Eichengreen, Barry & Goulder, Lawrence H., 1990. "the Impact of Permanent and Temporary Import Surcharges on the U.S. Trade Deficit," Department of Economics, Working Paper Series qt1ps4s00g, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    5. Warwick J. McKibbin & Martin T. Ross & Robert Shackleton & Peter J. Wilcoxen, 1999. "Emissions Trading, Capital Flows and the Kyoto Protocol," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 287-333.
    6. Bettendorf, Leon, 1998. "Investment-Promoting Policies in the Presence of International Interactions," Journal of Policy Modeling, Elsevier, vol. 20(6), pages 715-740, December.
    7. Keuschnigg, Christian & Kohler, Wilhelm K., 1994. "Commercial Policy and Dynamic Adjustment Under Monopolistic Competition," CEPR Discussion Papers 1037, C.E.P.R. Discussion Papers.
    8. Warwick J. McKibbin & Peter J. Wilcoxen, 1999. "Permit Trading Under the Kyoto Protocol and Beyond," Economics and Environment Network Working Papers 9902, Australian National University, Economics and Environment Network.
    9. Bovenberg, A.L., 1992. "Investment-promoting policies in open economies: The importance of intergenerational and international distributional effects," Discussion Paper 1992-20, Tilburg University, Center for Economic Research.
    10. Warwick J. McKibbin & Robert Shackleton & Peter J. Wilcoxen, 1998. "What to Expect from an International System of Tradable Permits for Carbon Emmisions," Economics and Environment Network Working Papers 9804, Australian National University, Economics and Environment Network.
    11. Devarajan, Shantayanan & Go, Delfin S., 1998. "The Simplest Dynamic General-Equilibrium Model of an Open Economy," Journal of Policy Modeling, Elsevier, vol. 20(6), pages 677-714, December.
    12. Klundert, T.C.M.J. van de, 1990. "Crowding out and the wealth of nations," Discussion Paper 1990-29, Tilburg University, Center for Economic Research.
    13. Warwick J. McKibbin & Robert Shackleton & Peter J. Wilcoxen, 1998. "The Potential Effects of International Carbon Emissions Permit Trading Under the Kyoto Protocol," Economics and Environment Network Working Papers 9805, Australian National University, Economics and Environment Network.

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