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Fiscal Integration with Internal Trade: Quantifying the Effects of Equalizing Transfers

  • Trevor Tombe

    (University of Calgary)

  • Jennifer Winter

    (University of Calgary)

Financial transfers between regions of a country are ubiquitous. Richer regions contribute (often indirectly) to poorer regions, and this affects their welfare, productivity, and industry composition. Financial inflows raise welfare by funding current account deficits, and imports raise productivity by shutting down the lowest productivity firms. But there is little quantitative work examining these effects for fiscal transfers within countries. We fill this gap by augmenting and exploring a rich quantitative trade model with endogenous fiscal transfers, calibrated to detailed data for trade and financial flows within Canada. We find transfers significantly increase welfare, productivity, and specialization in downstream (final goods) sectors in recipient regions; the reverse is true in contributor regions. The effects are large. Alberta’s welfare and productivity are 9% and 0.6% lower, respectively, while increase PEI’s are 33% and 1.6% higher. Overall, real income differences are less than half what they would without fiscal integration. Finally, transfers affect gains from trade and spread those gains across all regions, even if policy (like the New West Partnership) liberalizes trade only among some.

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Paper provided by Department of Economics, University of Calgary in its series Working Papers with number 2013-28.

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Date of creation: 02 Sep 2016
Date of revision: 02 Sep 2016
Handle: RePEc:clg:wpaper:2013-28
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