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Effects of Consumption Taxes on Real Exchange Rates and Trade Balances

Author

Listed:
  • Caroline Freund

    (Peterson Institute for International Economics)

  • Joseph E. Gagnon

    (Peterson Institute for International Economics)

Abstract

This paper examines the effects of border-adjusted consumption taxes (mainly value added taxes or VATs) in a sample of 34 advanced economies from 1970 through 2015. We find that the real exchange rate tends to rise by the full amount of any consumption tax increase, with little effect on the current account balance and modest offsetting effects on the trade and income balances. Case studies suggest that adjustment comes initially through prices. We note that the border-adjusted cash flow tax of the House Republicans differs in important ways from consumption taxes used in our study, which raises the possibility of a slower adjustment process with temporarily larger trade effects.

Suggested Citation

  • Caroline Freund & Joseph E. Gagnon, 2017. "Effects of Consumption Taxes on Real Exchange Rates and Trade Balances," Working Paper Series WP17-5, Peterson Institute for International Economics.
    • Handle: RePEc:iie:wpaper:wp17-5
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    File URL: https://www.piie.com/publications/working-papers/effects-consumption-taxes-real-exchange-rates-and-trade-balances
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    Citations

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    Cited by:

    1. Gabriel Felbermayr & Marina Steininger, 2017. "Effekte der US-Präsidentschaft Trump – Neuer Protektionismus," FIW Policy Brief series 037, FIW.
    2. Fitzgerald, Doireann & Haller, Stefanie, 2018. "Exporters and shocks," Journal of International Economics, Elsevier, vol. 113(C), pages 154-171.
    3. Gabriel Felbermayr & Marina Steininger & Erdal Yalcin, 2017. "Global Impact of a Protectionist U.S. Trade Policy," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 89, October.
    4. Dorian Carloni, 2018. "How Nominal Foreign Currency Depreciation Against the U.S. Dollar Affects U.S. Wealth: Working Paper 2018-05," Working Papers 53931, Congressional Budget Office.
    5. 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.
    6. Youssef Benzarti & Alisa Tazhitdinova, 2021. "Do Value-Added Taxes Affect International Trade Flows? Evidence from 30 Years of Tax Reforms," American Economic Journal: Economic Policy, American Economic Association, vol. 13(4), pages 469-489, November.
    7. 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.
    8. Erdal Yalcin & Marina Steininger, 2018. "Worldwide Economic Impact of Increasingly Protectionist US Trade Policy," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 71(04), pages 30-38, February.
    9. Johannes Becker & Joachim Englisch, 2020. "Unilateral introduction of destination-based cash-flow taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 495-513, June.

    More about this item

    Keywords

    VAT; border tax adjustment; exchange rate adjustment; current account adjustment;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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