Abstract
This paper examines the consequences of trade diversion within the framework of a three-country,n-goods, two-period model. Two of the countries form a currency union while their currency floats with regard to the one of the third country. Trade diversion here is a shift in import demand from the goods produced in the third country to those produced by the union partner. It will be shown that because of the direct demand effect and the real balance effect, trade diversion will clearly increase intertemporal welfare in both union countries.
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Tolonen, Y. Trade diversion in a currency union. Open Econ Rev 5, 23–27 (1994). https://doi.org/10.1007/BF01000742
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DOI: https://doi.org/10.1007/BF01000742