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Time-intensive R&D and unbalanced trade

Listed author(s):
  • Sauré, Philip

This paper highlights a novel mechanism that generates global imbalances. It develops a general equilibrium trade model with one of two countries having a comparative advantage in a sector whose production is characterized by (i) rapid, anticipated demand growth and (ii) large up-front R&D costs. International funding of the accruing R&D costs generates capital inflows in the R&D stage, which are balanced by subsequent outflows. Importantly, sector-level growth does not generate growth differentials between countries, typically regarded as rationales of global imbalances. Additionally, it is shown that a trade surplus can coincide with appreciations of the real exchange rate. I argue that Switzerland's trade surplus, which was driven to record heights during 2010–2014 by pharmaceutical exports, exemplifies this mechanism. Calibrating the model to Swiss trade flows underpins this argument.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 91 (2017)
Issue (Month): C ()
Pages: 229-244

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Handle: RePEc:eee:eecrev:v:91:y:2017:i:c:p:229-244
DOI: 10.1016/j.euroecorev.2016.10.001
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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