This thesis sets up and solves an intertemporal general equilibrium model of
regional rebalancing. The world consists of two regions, each endowed with
two goods -one tradable and one nontradable. The model is solved in closedform
which makes the rebalancing process transparent. In particular, first
order difference equations governing the price paths are established. Another
benefit of the closed-form solution is that it allows for global analysis, and
not just locally around the equilibrium. Further, the price of nontraded
goods outside equilibrium are derived and the transfer effect is quantified.
By linearization, the thesis obtains a rule of thumb for the misalignment in
nontraded goods’ prices out of equilibrium. The thesis calculates the welfare
costs associated with a suboptimal consumption allocation. Further, the
thesis simulates the rebalancing of regional imbalances between the core and
periphery in the Eurozone. The model predicts that current consumption
is likely to deviate from the optimal allocation. The rebalancing leads to
significant inflation differences between the core and the periphery. Finally,
the welfare costs from the suboptimal consumption allocation seem to be
relatively small. However, the costs differ significantly between the regions
