Trade Costs and the Open Macroeconomy

Dennis Novy

No 269748, Economic Research Papers from University of Warwick - Department of Economics

Abstract: Trade costs are known to be a major obstacle to international economic integration. Following the approach of New Open Economy Macroeconomics, this paper explores the e§ects of international trade costs in a micro-founded general equilibrium model that also allows for pricing to market. Trade costs are shown to create an endogenous home bias in consumption and reduce cross-country consumption correlations. In addition, trade costs magnify exchange rate volatility in response to monetary shocks and typically turn a monetary expansion into a beggar-thy-neighbor policy. It is striking that trade costs generally lead to these results both under producer and local currency pricing.

Keywords: Agricultural and Food Policy; International Relations/Trade (search for similar items in EconPapers)
Pages: 36
Date: 2006-11-14
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Related works:
Journal Article: Trade Costs and the Open Macroeconomy (2010)
Working Paper: Trade Costs and the Open Macroeconomy (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:269748

DOI: 10.22004/ag.econ.269748

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