Trade and Tax Reforms in a Cash-in-Advance Economy

We examine the effects of coordinated trade-tax reforms and isolated tariff reforms on market access, government revenue and welfare for a small monetary economy, under the assumption that a certain fraction of purchases of each good must be financed with cash held in advance. Moreover, we allow for this fraction of purchases to vary across markets, in the sense that the required amount of money balances per unit of value is different for each good. We show that: i) a uniform radial reduction of tariffs has ambiguous effects on both welfare and market access, ii) tariff and consumption tax reforms that leave consumer prices unchanged are more efficient in improving market access and welfare than a reform that involves only tariffs, and iii) export and production tax reforms that keep producer prices unchanged might be welfare deteriorating.