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

Paolo Epifani () and Gino Gancia ()

No 11014, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 to a welfare increase under standard parameter configurations. In addition, policies that stabilize the exchange rate can make the balanced-trade equilibrium unstable. These results can explain why the manufacturing sector may agglomerate in countries that resist the real appreciation of their currency and suggest that a fixed exchange rate and nominal rigidities may generate short-run instability.

Keywords: intermediate goods; monopolistic competition; trade costs; trade imbalances (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-opm
Date: 2015-12
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Journal Article: Global imbalances revisited: The transfer problem and transport costs in monopolistic competition (2017) Downloads
Working Paper: Global imbalances revisited: The transfer problem and transport costs in monopolistic competition (2017) Downloads
Working Paper: Global Imbalances Revisited: The Transfer Problem and Transport Costs in Monopolistic Competition (2015) Downloads
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