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The Macroeconomic Effect of Trade Policy

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Listed:
  • Christopher Erceg

    (Federal Reserve Board)

  • Andrea Prestipino

    (Federal Reserve Board)

  • Andrea Raffo

    (Federal Reserve Board)

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.

Suggested Citation

  • Christopher Erceg & Andrea Prestipino & Andrea Raffo, 2018. "The Macroeconomic Effect of Trade Policy," 2018 Meeting Papers 221, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:221
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    Cited by:

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    2. Chen, Sihao & Devereux, Michael B. & Shi, Kang & Xu, Juanyi, 2021. "Exchange rates, local currency pricing and international tax policies," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 460-472.
    3. Yuko Imura, 2023. "Reassessing Trade Barriers with Global Production Networks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 77-116, December.
    4. Mandelman, Federico S. & Waddle, Andrea, 2020. "Intellectual property, tariffs, and international trade dynamics," Journal of Monetary Economics, Elsevier, vol. 109(C), pages 86-103.
    5. Wilko Bolt & Kostas Mavromatis & Sweder van Wijnbergen, "undated". "The Global Macroeconomics of a Trade War: The EAGLE model on the US-China trade conflict," Tinbergen Institute Discussion Papers 19-015/VIII, Tinbergen Institute.
    6. Yuko Imura, 2019. "Reassessing Trade Barriers with Global Value Chains," Staff Working Papers 19-19, Bank of Canada.
    7. Broadbent, Ben & Di Pace, Federico & Drechsel, Thomas & Harrison, Richard & Tenreyro, Silvana, 2019. "The Brexit vote, productivity growth and macroeconomic adjustments in the United Kingdom," Discussion Papers 51, Monetary Policy Committee Unit, Bank of England.
    8. Corsetti, Giancarlo & Bergin, Paul R, 2020. "The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response?," CEPR Discussion Papers 14556, C.E.P.R. Discussion Papers.
    9. Evgeny N. Smirnov & Sergey A. Lukyanov, 2021. "Instability of international trade and approaches to optimal regulation," Upravlenets, Ural State University of Economics, vol. 12(5), pages 21-31, November.
    10. Stéphane AURAY & Michel B. DEVEREUX & Aurélien EYQUEM, 2020. "The Demand for Trade Protection over the Business Cycle," Working Papers 2020-08, Center for Research in Economics and Statistics.
    11. Barattieri, Alessandro & Cacciatore, Matteo & Ghironi, Fabio, 2021. "Protectionism and the business cycle," Journal of International Economics, Elsevier, vol. 129(C).
    12. Christopher J. Erceg & Andrea Prestipino & Andrea Raffo, 2022. "Trade policies and fiscal devaluations," International Finance Discussion Papers 1347, Board of Governors of the Federal Reserve System (U.S.).
    13. V. V. Chari & Juan Pablo Nicolini & Pedro Teles, 2023. "Optimal Cooperative Taxation in the Global Economy," Journal of Political Economy, University of Chicago Press, vol. 131(1), pages 95-130.
    14. Omar Barbiero & Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, 2019. "The Macroeconomics of Border Taxes," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 395-457.
    15. Robert Ambrisko, 2019. "Fiscal Devaluation in a Small Open Economy," Russian Journal of Money and Finance, Bank of Russia, vol. 78(1), pages 67-88, March.
    16. Wilko Bolt & Kostas Mavromatis & Sweder van Wijnbergen, "undated". "The Global Macroeconomics of a Trade War: The EAGLE model on the US-China trade conflict," Tinbergen Institute Discussion Papers 19-015/VIII, Tinbergen Institute.
    17. Stéphane Auray & Michael B. Devereux & Aurélien Eyquem, 2019. "Endogenous Trade Protection and Exchange Rate Adjustment," NBER Working Papers 25517, National Bureau of Economic Research, Inc.
    18. Dmitry Matveev & Francisco Ruge-Murcia, 2020. "Tariffs and the Exchange Rate : Evidence from Twitter," Cahiers de recherche 19-2020, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    19. Barry Eichengreen, 2019. "Trade Policy and the Macroeconomy," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(1), pages 4-23, March.
    20. Giampaolo Arachi & Debora Assisi, 2021. "Fiscal devaluation and relative prices: evidence from the Euro area," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(3), pages 685-716, June.
    21. Karyne B. Charbonneau, 2019. "The Impact of a Trade War: Assessment of the Current Tariffs and Alternative Scenarios," Staff Analytical Notes 2019-20, Bank of Canada.
    22. Hernández Vega Marco A., 2021. "Tariffs and Macroeconomic Dynamics," Working Papers 2021-25, Banco de México.

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F30 - International Economics - - International Finance - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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