RESEARCH SEMINAR. Optimal policy mix in economic unions
Seminars
29
oktoober2025
11:00 - 12:00
On Wednesday, October 29, from 11:00 to 12:00, a research seminar will take place at Eesti Pank, where Associate Professor Glenn Magerman from the Vrije Universiteit Brussel will present his research titled “Optimal policy mix in economic unions.”
The paper examines which combination of trade policy, industrial policy, and government spending would be optimal from the perspective of an economic union to achieve the greatest welfare gain. The study tests the economic model both theoretically and empirically, using data from 235 European regions and 54 sectors of the global economy. A short English summary of the research can be found at the end of this invitation.
Glenn Magerman’s main research areas are production networks, global value chains, and trade. More information about his research and publications is available at https://www.glennmagerman.com/ He also serves as an academic consultant for the European Central Bank’s research network “Challenges to Monetary Policy.”
Please confirm your participation by October 27 by sending an email to [email protected]
The seminar can also be attended via Microsoft Teams
Glenn Magerman (Université Libre de Bruxelles)
We develop a quantitative general equilibrium framework to analyze optimal policy design in economic unions. The model features multiple locations and sectors connected through input-output linkages, monopolistic competition with external economies of scale, and love of variety across both source locations and product varieties. There are local and supranational governments, each with their own budgets to implement a toolbox of trade, industrial, and public policies. We derive analytical welfare decompositions at both the location and union levels. Three key results characterize the roles of standalone optimal policies. First, trade policy implies free trade as common external tariff requirements prevent exploiting location-specific comparative advantages. Second, industrial policy exploits input-output linkages to correct misallocation by subsidizing upstream industries, propagating benefits downstream, enabling taxation of downstream sectors. Third, public policy concentrates expenditures in sectors with high economies of scale, but cannot effectively correct misallocation. Optimal policy design combines all three instruments: trade policy extracts terms-of-trade rents through positive tariffs, industrial policy targets upstream misallocation, and government expenditure smooths locational disparities arising from the incidence of the other policies. We illustrate the framework using data on 235 EU regions and the rest of the world across 54 sectors. The optimal policy mix delivers aggregate welfare gains of 12.9% relative to laissez-faire, substantially exceeding the sum of standalone policies, demonstrating strong complementarities across instruments.