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

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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.

Suggested Citation

  • Paolo Epifani & Gino Gancia, 2015. "Global imbalances revisited: The transfer problem and transport costs in monopolistic competition," Economics Working Papers 1503, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2017.
  • Handle: RePEc:upf:upfgen:1503
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    Cited by:

    1. Paul R. Bergin & Giancarlo Corsetti, 2020. "Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(4), pages 246-286, October.
    2. Trevor Tombe & Jennifer Winter, 2021. "Fiscal integration with internal trade: Quantifying the effects of federal transfers in Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(2), pages 522-556, May.
    3. Jungho Lee & Shang-Jin Wei & Jianhuan Xu, 2020. "The Welfare Cost of a Current Account Imbalance: A "Clean" Effect," NBER Working Papers 27276, National Bureau of Economic Research, Inc.
    4. Corsetti, Giancarlo & Bergin, Paul R, 2020. "The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response?," CEPR Discussion Papers 14556, C.E.P.R. Discussion Papers.
    5. Trionfetti, Federico, 2018. "Firm heterogeneity, comparative advantage and the transfer problem," European Economic Review, Elsevier, vol. 108(C), pages 246-258.
    6. Eren Gürer, 2022. "Rising markups and optimal redistributive taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(5), pages 1227-1259, October.
    7. Bergin, Paul R., 2022. "Currency undervaluation and comparative advantage," European Economic Review, Elsevier, vol. 150(C).
    8. Lee, Jungho & Wei, Shang-Jin & Xu, Jianhuan, 2024. "Trade imbalance, heavy goods, and pollution," Journal of International Money and Finance, Elsevier, vol. 144(C).
    9. Bergin, Paul R. & Corsetti, Giancarlo, 2023. "The macroeconomic stabilization of tariff shocks: What is the optimal monetary response?," Journal of International Economics, Elsevier, vol. 143(C).
    10. Wei, Shang-Jin & Lee, Jungho & Xu, Jianhuan, 2021. "The Welfare Cost of a Current Account Imbalance: A 'Clean' Channel," CEPR Discussion Papers 15805, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Trade Imbalances; Trade Costs; Monopolistic Competition; Intermediate Goods.;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade

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