The Welfare Gains of Trade Integration in the European Monetary Union
GATE Working Paper No. 09-27
30 Pages Posted: 17 Feb 2010 Last revised: 6 Apr 2011
Date Written: December 1, 2009
This paper evaluates the welfare gains arising from a 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 both in private consumption and production. The model is estimated and globally not rejected by the data. Two main results emerge: (i) an increase in vertical (intermediate goods) trade implies welfare gains while (ii) an increase in horizontal trade implies welfare losses.
Keywords: trade integration, ináation differentials, welfare analysis, optimal currency areas
JEL Classification: F32, F41, F47
Suggested Citation: Suggested Citation