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Trade diversion in a currency union


  • Yrjänä Tolonen


This paper examines the consequences of trade diversion within the framework of a three-country,n-goods, two-period model. Two of the countries form a currency union while their currency floats with regard to the one of the third country. Trade diversion here is a shift in import demand from the goods produced in the third country to those produced by the union partner. It will be shown that because of the direct demand effect and the real balance effect, trade diversion will clearly increase intertemporal welfare in both union countries. Copyright Kluwer Academic Publishers 1994

Suggested Citation

  • Yrjänä Tolonen, 1994. "Trade diversion in a currency union," Open Economies Review, Springer, vol. 5(1), pages 23-27, March.
  • Handle: RePEc:kap:openec:v:5:y:1994:i:1:p:23-27
    DOI: 10.1007/BF01000742

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    References listed on IDEAS

    1. Rodrik, Dani, 1987. "Trade and capital-account liberalization in a keynesian economy," Journal of International Economics, Elsevier, vol. 23(1-2), pages 113-129, August.
    2. Persson, Torsten, 1982. " Global Effects of National Stabilization Policies under Fixed and Floating Exchange Rates," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 165-192.
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    currency union; trade diversion; customs union;


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