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Effects of Consumption Taxes on Real Exchange Rates and Trade Balances

Listed author(s):
  • Caroline Freund

    ()

    (Peterson Institute for International Economics)

  • Joseph E. Gagnon

    ()

    (Peterson Institute for International Economics)

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.

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File URL: https://piie.com/publications/working-papers/effects-consumption-taxes-real-exchange-rates-and-trade-balances
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Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP17-5.

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Date of creation: Apr 2017
Handle: RePEc:iie:wpaper:wp17-5
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