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Trade and Domestic Policies under Monopolistic Competition

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  • Alessia Campolmi
  • Harald Fadinger
  • Chiara Forlati

Abstract

Should trade agreements constrain domestic policies? We analyse this question using a model with monopolistic competition and constant-elasticity-of-substitution demand. We develop a welfare decomposition to show that welfare changes induced by trade and domestic policies can be decomposed into consumption and production efficiencies and terms-of-trade effects. We analyse the reasons to sign trade agreements and compare shallow and deep trade agreements, modelled according to GATT-WTO rules. Under monopolistic competition, unlike deep trade agreements, shallow agreements with market access commitments may not achieve efficiency because terms of trade can be improved without reducing market access by increasing the set of foreign firms selling domestically.

Suggested Citation

  • Alessia Campolmi & Harald Fadinger & Chiara Forlati, 2025. "Trade and Domestic Policies under Monopolistic Competition," The Economic Journal, Royal Economic Society, vol. 135(667), pages 892-913.
  • Handle: RePEc:oup:econjl:v:135:y:2025:i:667:p:892-913.
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    3. Gene M. Grossman & Elhanan Helpman, 2021. "When Tariffs Disrupt Global Supply Chains," Working Papers 2021-73, Princeton University. Economics Department..
    4. Arnaud Costinot & Andrés Rodríguez‐Clare & Iván Werning, 2020. "Micro to Macro: Optimal Trade Policy With Firm Heterogeneity," Econometrica, Econometric Society, vol. 88(6), pages 2739-2776, November.
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    6. Luca Macedoni & Ariel Weinberger, 2021. "Quality Misallocation, Trade, and Regulations," CESifo Working Paper Series 9041, CESifo.
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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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