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Globalization, markups and the natural rate of interest

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  • Jean-Marc Natal
  • Nicolas Stoffels

Abstract

In this paper, we investigate how, in a stylised theoretical framework, an increase in the degree of globalization - modelled as a deline in trade costs - affects the real natural rate of interest by impacting firms markups. Outlining a two- country dynamic general equilibrium model with endogenous elasticity of substitution between goods, we suggest two main propositions: 1) Globalization - via the impplied variation in markups - has a potentially significant impact on the natural rate of interest. 2) Simple, plausible markup dynamics may have contributed to explain the recent "conundrum" of world interest rates.

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File URL: http://www.snb.ch/n/mmr/reference/working_paper_2007_14/source/working_paper_2007_14.n.pdf
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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2007-14.

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Length: 37 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:snb:snbwpa:2007-14

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Keywords: globalization; natural interest rate; trade costs;

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