Global Imbalances Revisited: The Transfer Problem and Transport Costs in Monopolistic Competition

Paolo Epifani () and Gino Gancia

No 864, Working Papers from Barcelona School of Economics

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.

Keywords: monopolistic competition; trade imbalances; trade costs; intermediate goods (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-int and nep-opm
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Related works:
Journal Article: Global imbalances revisited: The transfer problem and transport costs in monopolistic competition (2017)
Working Paper: Global imbalances revisited: The transfer problem and transport costs in monopolistic competition (2017)
Working Paper: Global Imbalances Revisited: The Transfer Problem and Transport Costs in Monopolistic Competition (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:864

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