Trade and Domestic Policies Under Monopolistic Competition

95 Pages Posted: 8 Oct 2018 Last revised: 1 Jun 2020

See all articles by Alessia Campolmi

Alessia Campolmi

Universitat Pompeu Fabra

Harald Fadinger

University of Mannheim

Chiara Forlati

Ecole Polytechnique Fédérale de Lausanne

Date Written: October 2018

Abstract

Should trade agreements also constrain domestic policies? We analyze this question from the perspective of heterogeneous-firm models with monopolistic-competition and multiple sectors. We propose a welfare decomposition based on principles from welfare economics to show that, in a very broad class of models, welfare changes induced by trade and domestic policies can be exactly decomposed into consumption-efficiency, production-efficiency and terms-of-trade effects. Using this decomposition, we compare trade agreements with different degrees of cooperation on domestic policies and show how their performance is affected by the interaction between firm heterogeneity and the relative importance of production efficiency versus terms-of-trade effects.

Keywords: Domestic Policy, efficiency, Heterogeneous Firms, Tariffs and Subsidies, terms of trade, Trade agreements, trade policy

JEL Classification: F12, F13, F42

Suggested Citation

Campolmi, Alessia and Fadinger, Harald and Forlati, Chiara, Trade and Domestic Policies Under Monopolistic Competition (October 2018). CEPR Discussion Paper No. DP13219, Available at SSRN: https://ssrn.com/abstract=3262544

Alessia Campolmi (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Harald Fadinger

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Chiara Forlati

Ecole Polytechnique Fédérale de Lausanne ( email )

Station 5
Odyssea 1.04
1015 Lausanne, CH-1015
Switzerland

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