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
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)
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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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