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

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.