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The Dynamics of Revenue-Neutral Trade Liberalization

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  • Ligthart, J.E.

    (Tilburg University, School of Economics and Management)

  • van der Meijden, G.C.

    (Tilburg University, School of Economics and Management)

Abstract

The paper studies the dynamic welfare and macroeconomic effects of a revenue-neutral strategy of offsetting tariff reductions with increases in destination-based consumption taxes. To this end, we employ a dynamic general equilibrium model of a small open developing economy, featuring endogenous labor supply and sector-specifc capital and land. In contrast to conventional results from tax-tariff reform studies based on fixed factor endowments, we and that instantaneous utility and the volume of trade fall on impact. Aggregate output rises in the short run, refl ecting increased labor supply and a more efficient allocation of resources across sectors. In the long run, however, aggregate output declines, whereas instantaneous utility and the volume of trade increase compared to the pre-reform equilibrium. For a plausible calibration of the model, lifetime welfare is shown to increase.
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  • Ligthart, J.E. & van der Meijden, G.C., 2011. "The Dynamics of Revenue-Neutral Trade Liberalization," Other publications TiSEM 1d95686d-f518-4a0e-aad6-3, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:1d95686d-f518-4a0e-aad6-3b4e84a03c40
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    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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