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Trade Costs and the Open Macroeconomy

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  • Dennis Novy

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 effects of international trade costs in a micro-founded general equilibrium model that allows for different degrees of exchange rate pass-through. Trade costs are shown to create an endogenous home bias in consumption and the model performs well in matching empirical trade shares for OECD countries. In addition, trade costs reduce cross-country output and consumption correlations, and they magnify exchange rate volatility. Trade costs turn a monetary expansion into a beggar-thy-neighbor policy. Copyright © The editors of the "Scandinavian Journal of Economics" 2010 .

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 112 (2010)
Issue (Month): 3 (09)
Pages: 514-545

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Handle: RePEc:bla:scandj:v:112:y:2010:i:3:p:514-545

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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  1. Andrew Atkeson & Ariel Burstein, 2007. "Pricing-to-market, trade costs, and international relative prices," Working Paper Series 2007-26, Federal Reserve Bank of San Francisco.
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Cited by:
  1. Munasib, Abdul & Roy, Devesh, 2013. "Nontariff Barriers as Bridge to Cross," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149680, Agricultural and Applied Economics Association.
  2. Aidt, T.S. & Jensen, P.S., 2011. "Workers of the World, Unite! Franchise Extensions and the Threat of Revolution in Europe, 1820-1938," Cambridge Working Papers in Economics 1102, Faculty of Economics, University of Cambridge.
  3. Mahbub Morshed, A.K.M. & Turnovsky, Stephen J., 2011. "Real exchange rate dynamics: The role of elastic labor supply," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1303-1322.
  4. Tervala, Juha, 2013. "Learning by devaluating: A supply-side effect of competitive devaluation," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 275-290.
  5. Hwang, Yu-Ning & Turnovsky, Stephen J., 2013. "Exchange rate pass-through and the effects of tariffs on economic performance and welfare," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 81-102.

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