Competitive Tax Reforms in a Monetary Union with Endogenous Entry and Tradability
GATE WP 1706 – February 2017
32 Pages Posted: 14 Feb 2017
Date Written: February 14, 2017
We quantify the effects of competitive tax reforms within a two-country monetary union model with endogenous entry and endogenous tradability. As expected, their effects on out-put, consumption, hours worked and the terms of trade are positive. Extensive margins provide additional transmission mechanisms that turn the response of foreign output from negative to positive and yields larger aggregate welfare gains compared to alternative models. These positive spillovers are due to the positive effect of the reform on variety creation in both countries and change our vision of this type of reform from beggar-thy-neighbor to prosper-thy-neighbor.
Keywords: Competitive tax reforms, endogenous tradability, endogenous varieties, monetary union, taxes, fiscal devaluations
JEL Classification: E32, E52, F41
Suggested Citation: Suggested Citation