Three-country World Research Articles

An International Trade Model with Entrepreneurs and Financial Markets

We consider a two-period model of a three-country world with free trade in finished products and some factor mobility, where production is subject to uncertainty. Enterpreneurs may establish production in other countries but can obtain financing only in the country of origin. In this model, integrating production across countries, in particular integrating economically strong and weak partners, may give rise to a welfare loss, showing that traditional views on efficiency of international trade must be reconsidered when risk and uncertainty are taken into account.

Spillover Effects of Labour Market Reforms in a Three-Country World

I extend the model-based literature on spillover effects of labour market reforms on foreign (un-)employment by allowing for third-country effects. When the workhorse two-country model is enlarged to include a third country, a reform causes an additional indirect effect through a terms-of-trade shift between the foreign countries. To quantify the increase or reduction in the overall spillover by means of this channel, simulations based on empirically realistic scenarios are carried out. Thereby, the indirect effect turns out to be too small to overturn the direct effect or to increase it considerably. Differences in the reform spillover effects between foreign countries are mainly due to differences in characteristics which in uence the size of the direct impact.

PROFIT TAX AND FIRM MOBILITY IN A THREE-COUNTRY MODEL

We construct a three-country model that incorporates international relocation by imperfectly competitive firms and examine both the effects of each country's profit tax reduction on the consumption and welfare of all countries, and the incentive for the countries to decrease the profit tax. In such a model, both the terms of trade and international relocation of firms offer the key to understanding the impacts of one country's profit tax policy. In particular, we note that the relocation of firms from the other two countries is positively related to the wage incomes of the third country through a shift in labour demand, and the terms-of-trade improvement is not only positively related to the wage incomes, but also negatively related to profit incomes through a shift in world consumption demand. We show that (i) in a three-country world economy, regardless of the reduction's source, the profit tax reduction of each country leads to relocation of firms away from foreign countries toward its own economy and deteriorates the terms of trade of its economy and (ii) this becomes a ‘beggar-thy-neighbour’ policy in the sense that it lowers the welfare of the other foreign countries.

Market linkages with fragmented production

I use a Ricardian model to analyze the transmission of technology shocks between countries when production processes are fragmented. The analysis emphasizes the role of three factors in determining how the gains from technical progress are shared between the innovating country and the rest of the world: the elasticity of substitution in consumption of final goods, the elasticity of substitution between intermediate and final production stages, and the pattern of production. In contrast to models with trade in final goods only, a high elasticity of substitution in consumption may be associated with losses for the innovating country when there is complete vertical specialization in production. I also examine the transmission of shocks in a three-country world where two countries are linked in a vertical production relationship.

Economic Consequences of Pegging to the Dollar in a Multicurrency World

The paper studies the monetary mechanism of a three‐country world where two large countries are engaged in floating exchange rates with each other, and a small country is pegged to one of these large countries. Three countries possess an endogenous wage determination process, so that the choice of exchange‐rate regimes has real consequences. This arrangement creates serious difficulties for the small country. The paper evaluates the relative effectiveness of options for the small country, taking account of endogeneity of wage determination. Complete float of the small country and the currency basket pegging both present promising alternatives, but the complete float is likely to be best.

Defense Expenditures and Allied Cooperation

This article investigates the implications of cooperative and noncooperative defense spending of allied countries in conflicting blocs using static and leader-follower game models. It is well known that in the three-country world with two allies and an adversary, all countries may be worse off when the allies cooperate than when they do not. This article shows that when the number of countries in each separate bloc is large, the countries in one bloc may be better off by cooperating than not, even if the negative spillover from the adversarial bloc is large. Furthermore, cooperative behavior in a leader-follower game by the leader bloc can attain a better outcome than noncooperation.

The international transmission of economic shocks in a three-country world under mixed exchange rates

The international transmission of economic disturbances is analyzed in a three-country world where two countries have no macroeconomic impact on a third country but are large enough to influence each other under a system of mixed exchange rates (MER)—a system that combines the fixed exchange rates (FERs) among two EC member countries (Germany and France) and the flexible exchange rates (FLERs) towards a third country, the rest of the world (USA). We find that a positive output demand shock originating in Germany or France has a positive effect on domestic output, but, due to a special third country effect, is likely to produce a contractionary impact on foreign output (negative transmission) while the total effect on the world economy is expansionary. Money supply shocks in either Germany or France have identical effects on the output of the two countries. The FLER component of the MER regime serves as an important tool for dampening the impact of US shocks on the output of the EC. (JEL F31).

Economic integration and the environment: Effects on members and non-members

The paper analyses the effects of economic integration and national environmental policies in a three-country world. There are two factors of production, an environmental good and capital, which is internationally mobile. Two of the countries create an internal market. This is modelled by a reduction in mobility costs. This process of economic integration leads to a relocation of the factors of production. The welfare effects of factor relocation are analysed for different types of environmental policies. Special emphasis is placed on the issue of international externalities such as transboundary pollution spill-overs.

Dynamic Assessment of Financial, Monetary and Real Disturbances in a Three-Country World: Derivation of a Basic Inequality

Dynamic Assessment of Financial, Monetary and Real Disturbances in a Three-Country World: Derivation of a Basic Inequality

Foreign Ownership and the Theory of Trade and Welfare

Some standard topics in the theory of international trade are reconsidered in this paper by distinguishing between national and aggregate income when fixed supplies of foreign inputs are present within the home country. Under conditions that would ensure a national welfare gain if foreign ownership were absent, international transfer, economic growth, or tariff policy might cause a national welfare loss in the presence of foreign ownership. The techniques developed could be applied to other domestic distinctions (such as those based on race, sex, age, or ethnicity) and to the theory of customs unions in a three-country world.