We evaluate the quantitative effects of introducing costs of transporation into an international trade model. We model these costs through the introduction of international transportation services sector. Costs of transportation have substantial long-run effects on welfare and may impact on the pattern of trade. However, business cycle effects on relative price movements and on international comovements are less pertinent since decreased trade volatility counteracts the effects of transportation cost variations. Nevertheless, it is also shown that costs of transportation combined with delivery lags go a long way towards resolving, in particular, the international comovement puzzle.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
3530.
Find related papers by JEL classification: E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles F31 - International Economics - - International Finance - - - Foreign Exchange F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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