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Value of WTO trade agreements in a New Keynesian model

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  • Ganelli, Giovanni
  • Tervala, Juha

Abstract

We revisit the question of the quantitative benefits of WTO trade agreements in a setup that is non-standard from the traditional trade policy point of view. We show that in a New Keynesian model, unilateral trade liberalization reduces welfare due to terms-of-trade deterioration, creating an incentive for a trade agreement. For realistic parameter values, the value of an agreement, which cuts tariffs by one percentage point, is 0.5–2% of consumption, much larger than in trade models. The intuition for this result hinges on endogenous labor supply.

Suggested Citation

  • Ganelli, Giovanni & Tervala, Juha, 2015. "Value of WTO trade agreements in a New Keynesian model," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 347-362.
  • Handle: RePEc:eee:jmacro:v:45:y:2015:i:c:p:347-362
    DOI: 10.1016/j.jmacro.2015.06.001
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    Citations

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    Cited by:

    1. Engler, Philipp & Tervala, Juha, 2018. "Welfare effects of TTIP in a DSGE model," Economic Modelling, Elsevier, vol. 70(C), pages 230-238.
    2. Michael Regan, 2017. "Capital Markets, Infrastructure Investment and Growth in the Asia Pacific Region," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 5(1), pages 1-28, February.
    3. repec:red:issued:18-178 is not listed on IDEAS
    4. David Rosnick, 2015. "The Gains from Trade in a New Model from the IMF: Still Very Small," CEPR Reports and Issue Briefs 2015-10, Center for Economic and Policy Research (CEPR).

    More about this item

    Keywords

    Tariffs; Terms of trade theory; Trade agreement; Trade liberalization; WTO;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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