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Value of WTO trade agreements in a New Keynesian model

Listed author(s):
  • Ganelli, Giovanni
  • Tervala, Juha

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0164070415000749
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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 45 (2015)
Issue (Month): C ()
Pages: 347-362

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Handle: RePEc:eee:jmacro:v:45:y:2015:i:c:p:347-362
DOI: 10.1016/j.jmacro.2015.06.001
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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