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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, though little is known about how they interact with trade. We show trade is crucial for evaluating the welfare and productivity effect of transfers. Transfers also affect the spatial and sectoral distribution of economic activity. To do this, we augment a rich quantitative trade model to include endogenous fiscal transfers, and calibrate the model using detailed data for trade and financial flows within Canada. Transfers significantly increase welfare, productivity, and specialization in downstream (final goods) sectors in recipient regions; the reverse is true in contributor regions. Fiscal transfers also affect gains from trade and the effects of trade policy changes. We end with an application to increased fiscal integration among Eurozone countries.

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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: 25 Jan 2016
Date of revision: 25 Jan 2016
Handle: RePEc:clg:wpaper:2013-28
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