Vertical Production and Trade Interdependence and Welfare

40 Pages Posted: 1 Sep 2005

See all articles by Kevin X. D. Huang

Kevin X. D. Huang

Federal Reserve Bank of Philadelphia; Vanderbilt University - College of Arts and Science - Department of Economics

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Abstract

The authors study international transmissions and welfare implications of monetary shocks in a two-country world with multiple stages of production and multiple boarder-crossings of intermediate goods. This empirically relevant feature is important, as it has opposite implications for two external spillover effects of a unilateral monetary expansion. If all production and trade are assumed to occur in a single stage, the conflict-of-interest terms-of-trade effect tends to dominate the common-interest efficiency-improvement effect for reasonable parameter values, so that the international welfare effects would depend in general on the underlying assumptions about the currencies of price setting. The stretch of production and trade across multiple stages of processing magnifies the efficiency-improvement effect and dampens the terms-of-trade effect. Thus, a monetary expansion can be mutually beneficial regardless of its source or the pricing assumptions.

Keywords: Vertical production and trade, monopolistic competition, terms-of-trade, welfare

JEL Classification: E32, F31, F41

Suggested Citation

Huang, Kevin X. D. and Liu, Zheng, Vertical Production and Trade Interdependence and Welfare. FRB Philadelphia Working Paper No. 05-15. Available at SSRN: https://ssrn.com/abstract=796085 or http://dx.doi.org/10.2139/ssrn.796085

Kevin X. D. Huang (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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