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THE WELFARE GAINS OF TRADE INTEGRATION IN THE EUROPEAN MONETARY UNION

Published online by Cambridge University Press:  01 October 2010

Stéphane Auray ,
Aurélien Eyquem  and
Jean-Christophe Poutineau
Stéphane Auray*
Affiliation:
Universités Lille Nord de France (ULCO), EQUIPPE, MESHS, USR 3185 Université de Sherbrooke (GREDI) and CIRPÉE
Aurélien Eyquem
Affiliation:
Ecole Normale Supérieure Lettres et Sciences Humaines, GATE and GREDI
Jean-Christophe Poutineau
Affiliation:
Université de Rennes 1, Ecole Normale Supérieure de Cachan and CREM
*
Address correspondence to: Stéphane Auray, Universités Lille Nord de France, Domaine Universitaire du Pont de Bois–BP 60149, 59653 Villeneuve d'Ascq Cedex, France; e-mail: stephane.auray@gmail.com.
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Abstract

This paper evaluates the welfare gains arising from deeper trade integration in the European Monetary Union. To do this, the European Monetary Union is represented in a realistic way by an intertemporal general equilibrium model with incomplete financial markets, sticky prices, and home bias in production. The model is estimated and not rejected by the data. Two main results emerge: (i) an increase in vertical trade (occuring at the early stage of the production process) implies welfare gains whereas (ii) an increase in horizontal trade (occuring at the late stage of the production process) implies welfare losses.

Keywords

Monetary UnionTrade IntegrationInflation DifferentialsWelfare Analysis
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 5 , November 2010 , pp. 645 - 676
Copyright
Copyright © Cambridge University Press 2010

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