Agriculture Reference
In-Depth Information
liberalisation, taken alone, reduces the home prices of foreign goods.
Households and firms therefore substitute away from home-produced goods,
reducing their prices relative to foreign goods abroad, thus causing a real
deprecaton. If the nomnal exchange rate s the target of monetary polcy
and the home economy is small by comparison with its trading partners, a
fall in the home price level (a deflation) is required. This must be brought
about by a monetary contracton n defence of the exchange rate. To the
extent that wages adjust more sluggishly than product prices, the deflation
causes the real wage to ncrease relatvely quckly and hence employment
growth to slow. Were the real deprecaton the only consequence of the
trade liberalisation shock, its effects would therefore be contractionary.
Trade reforms can, however, have positive effects in the short run. These
include allocative efficiency gains that emerge, even in the very short run,
and that rase aggregate productvty. Trade reforms also tend to rase the
expected future net return on installed capital, stimulating investment.
If the capital account is sufficiently open, an increase in foreign-financed
investment might occur, which contributes substantially to short-run
expansion. In essence, then, the issue we address is the robustness of the
much antcpated gans from Chnese trade reform n the short run and ts
dependence on macroeconomc polcy settngs.
To do this we use a comparative-static, global, macroeconomic model,
within which the microeconomic (supply) side is adapted from GTAP,
3
a
multi-region, comparative-static model in real variables with price-taking
households and all industries comprising identical competitive firms.
Following Yang and Tyers (2000), to this microeconomic base is added
independent representations of governments' fiscal regimes, with both
direct and indirect taxation, as well as separate assets in each region
(currency and bonds) and monetary polces wth a range of targets.
Wth ths model t s possble to conduct trade lberalsaton and other
experments under dfferent assumptons about macroeconomc polcy
regmes.
