Trade diversion in a currency union
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
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- 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 165-92.
- 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.
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