We study the welfare effects of trade imbalances in a two-sector model of monopolistic competition. As in perfect competition, a trade surplus involves an income transfer to the deficit country and possibly a terms-of-trade deterioration. Unlike the conventional wisdom, however, trade imbalances do not impose any double burden on surplus countries. This is because of a production-delocation effect, which leads to a reduction in the local price index. In the presence of intermediate goods, new results arise: A trade surplus may lead to an appreciation of the exchange rate, to a terms-of-trade improvement and even to a welfare increase. Numerical simulations show that, under realistic assumptions about preferences and technology, the beneficial price-index effect can significantly reduce the direct cost of the transfer.

Epifani, P., Gancia, G. (2017). Global imbalances revisited: The transfer problem and transport costs in monopolistic competition. JOURNAL OF INTERNATIONAL ECONOMICS, 108, 99-116 [10.1016/j.jinteco.2017.05.010].

Global imbalances revisited: The transfer problem and transport costs in monopolistic competition

Gancia G.
2017

Abstract

We study the welfare effects of trade imbalances in a two-sector model of monopolistic competition. As in perfect competition, a trade surplus involves an income transfer to the deficit country and possibly a terms-of-trade deterioration. Unlike the conventional wisdom, however, trade imbalances do not impose any double burden on surplus countries. This is because of a production-delocation effect, which leads to a reduction in the local price index. In the presence of intermediate goods, new results arise: A trade surplus may lead to an appreciation of the exchange rate, to a terms-of-trade improvement and even to a welfare increase. Numerical simulations show that, under realistic assumptions about preferences and technology, the beneficial price-index effect can significantly reduce the direct cost of the transfer.
Articolo in rivista - Articolo scientifico
Intermediate goods; Monopolistic competition; Trade costs; Trade imbalances;
English
2017
108
99
116
reserved
Epifani, P., Gancia, G. (2017). Global imbalances revisited: The transfer problem and transport costs in monopolistic competition. JOURNAL OF INTERNATIONAL ECONOMICS, 108, 99-116 [10.1016/j.jinteco.2017.05.010].
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10281/396698
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