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Territorial comparative advantage, wage inequality, and monetary policy in the global world

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  • Afonso, Oscar
  • Gil, Pedro Mazeda

Abstract

We analyze the effects of trade under relocations from an innovator to a follower region in a context with region-specific monetary policy and long-run inflation. We propose an endogenous growth model of two regions with intermediate goods of different skill intensities that are traded internationally. We show that the greater the benefits of relocations, the greater the territorial comparative advantage of followers. The better worldwide allocation of production due to relocations releases resources for R&D activities, increasing internationally available technological knowledge. In both regions, this ensures an increase in wage levels of skilled and unskilled workers and in economic growth. The structural stance of monetary policy in the follower region affects the optimal value of reallocations, but not the worldwide economic growth and skill premium. Yet, the monetary policy of the innovator region may penalize worldwide growth and impact the skill premium. Dynamic effects of relocations, under certain conditions, increase the skill premium in both regions.

Suggested Citation

  • Afonso, Oscar & Gil, Pedro Mazeda, 2024. "Territorial comparative advantage, wage inequality, and monetary policy in the global world," Journal of International Money and Finance, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:jimfin:v:143:y:2024:i:c:s0261560624000627
    DOI: 10.1016/j.jimonfin.2024.103075
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    More about this item

    Keywords

    Endogenous economic growth; Global firms; Inflation; Technological knowledge; Territorial comparative advantage; Skill premium;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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