Paper #1503

Títol:

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

Autors:

Paolo Epifani i Gino Gancia

Data:

Desembre 2015

Resum:

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.

Paraules clau:

Trade Imbalances; Trade Costs; Monopolistic Competition; Intermediate Goods.

Codis JEL:

F1

Àrea de Recerca:

Macroeconomia i Economia Internacional

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