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On the Welfare Implications of Customs Unions in the Presence of Finance Constraints


  • Palivos, Theodore
  • Yip, Chong K


We examine the welfare effects of a customs union on a small monetary economy. The role of money is captured by a generalized cash-in-advance constraint which allows for non-uniform monetization across sectors. This generates a demand-side distortion that results in a discrepancy between the marginal domestic rate of substitution and the world price. We show that, depending on the economy's inflation rate and the difference between the existing and the optimal tariff rate, trade creation may reduce welfare while trade diversion may improve it. Copyright 2001 by Blackwell Publishers Ltd and The Victoria University of Manchester

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  • Palivos, Theodore & Yip, Chong K, 2001. "On the Welfare Implications of Customs Unions in the Presence of Finance Constraints," Manchester School, University of Manchester, vol. 69(2), pages 164-178, March.
  • Handle: RePEc:bla:manchs:v:69:y:2001:i:2:p:164-78

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    1. Diebold, Francis X & Rudebusch, Glenn D, 1992. "Have Postwar Economic Fluctuations Been Stabilized?," American Economic Review, American Economic Association, vol. 82(4), pages 993-1005, September.
    2. Sensier, M. & van Dijk, D.J.C., 2001. "Short-term volatility versus long-term growth: evidence in US macroeconomic time series," Econometric Institute Research Papers EI 2001-11, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    3. Romer, Christina D., 1994. "Remeasuring Business Cycles," The Journal of Economic History, Cambridge University Press, vol. 54(03), pages 573-609, September.
    4. Chauvet, Marcelle, 1998. "An Econometric Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 969-996, November.
    5. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
    6. Koop, Gary & Potter, Simon M., 1998. "Bayes factors and nonlinearity: Evidence from economic time series1," Journal of Econometrics, Elsevier, vol. 88(2), pages 251-281, November.
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