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Varieties and the transfer problem

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Author Info

  • Corsetti, Giancarlo
  • Martin, Philippe
  • Pesenti, Paolo

Abstract

We revisit the classic transfer problem, accounting for two channels of adjustment: increased trade in existing goods and services (the intensive margin) and net creation and destruction of product varieties (the extensive margin). Over the medium term, the latter reduces the scope for real exchange rate and terms of trade variability in response to cross-border flows. We embed our transfer analysis in popular models of current account adjustment, where initial imbalances are driven by domestic demand for — or foreign supply of — net saving, possibly associated with over-optimistic expectations. Simulation exercises based on 2006 data suggest that a transfer of the size of the pre-crisis U.S. current account deficit may require only moderate trend depreciation in real terms, and that the aggregate welfare impact of the transfer is disconnected from the size of the relative price correction.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 89 (2013)
Issue (Month): 1 ()
Pages: 1-12

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Handle: RePEc:eee:inecon:v:89:y:2013:i:1:p:1-12

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Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords: Transfer problem; Current account imbalances; Extensive margin;

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Cited by:
  1. Jean-Sébastien Pentecôte & Jean-Christophe Poutineau & Fabien Rondeau, 2013. "Trade Integration and Business Cycle Synchronization in the EMU: the Negative Effect of New Trade Flows," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201313, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  2. Vahagn Galstyan, 2011. "Productivities, Trade, and Relative Prices in a Ricardian World," The Institute for International Integration Studies Discussion Paper Series iiisdp359, IIIS.
  3. Cavallari, Lilia, 2012. "Firms' entry, monetary policy and the international business cycle," MPRA Paper 41876, University Library of Munich, Germany.
  4. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 2-22.

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