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

Paolo Epifani, Gino Gancia

Research output: Journal PublicationArticlepeer-review

4 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)99-116
Number of pages18
JournalJournal of International Economics
Volume108
DOIs
Publication statusPublished - Sep 2017

Keywords

  • Intermediate goods
  • Monopolistic competition
  • Trade costs
  • Trade imbalances

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Global imbalances revisited: The transfer problem and transport costs in monopolistic competition'. Together they form a unique fingerprint.

Cite this