The Spillover Effects of Deregulation in a Three-Country Model

Abstract

This paper develops a three-country model that incorporates international relocation of firms and explores the macroeconomic effects of deregulation in the services sector by each country. A novel feature of our model is that the international relocation of firms responds to exchange rate movements caused by deregulation shocks in the services sector. From this analysis, it is found that a deregulation shock in a country always benefits the country in spite of the outflows of firms, while it can be detrimental to other two countries, in terms of relative consumption levels.