International Trade and Domestic Distortions: Modelling the Transition Process

Jean-Luc Gaffard and Francesco Saraceno

No 2007-18, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: According to the standard view, when full competition prevails in product, labour, and capital markets, positive or negative external trade shocks may be accommodated by the migration of jobs between sectors; the negative impact on some households' income of lower nominal wages will be more than offset by lower prices of imported final goods. Unemployment, if any, will be temporary, unless labour market rigidities prevent the necessary adjustment. We argue that trade shocks trigger a process of creative destruction that necessarily causes distortions in the structure of productive capacity and hence market disequilibria. Therefore, the structural change that follows trade shocks can no longer be analysed within an equilibrium framework. The transition following a shock may be characterized by increasing imbalances, and create scope for policy intervention. The model presented in this paper, which focuses on the time dimension of production and market imbalances, allows clarifying the debate.

Keywords: globalization; trade; financial constraints; creative destruction; wage flexibility; time to build; Firm migration (search for similar items in EconPapers)
JEL-codes: F11 F12 F42 F43 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (9)

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Related works:
Working Paper: International Trade and Domestic Distortions: Modelling the Transition Process (2007)
Working Paper: International Trade and Domestic Distortions: Modelling the Transition Process (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:fce:doctra:0718

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