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Relative price riddles in international business cycle theory: Are transport costs the explanation?

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  • Elisabetta Mazzenga
  • Morten O. Ravn

Abstract

We study relative price behavior in an international business cycle model with specialization in production, in which a goods market friction is introduced through transport costs. The transport technology allows for flexible transport costs. We analyze whether this extension can account for the striking differences between theory and data as far as the moments of terms of trade and real exchange rates are concerned. We find that transport costs increase both the volatility of the terms of trade and the volatility of the real exchange rate. However, unless the transport technology is specified by a Leontief technology, transport costs do not resolve the quantitative discrepancies between theory and data. A surprising result is that transport costs may actually lower the persistence of the real exchange rate, a finding that is in contrast to much of the emphasis of the empirical literature.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 312.

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Date of creation: May 1998
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Handle: RePEc:upf:upfgen:312

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Web page: http://www.econ.upf.edu/

Related research

Keywords: International business cycles; terms of trade; real exchange rates; transport costs;

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Cited by:
  1. Almuth Scholl, 2002. "Limited Enforceable International Loans, International Risk Sharing and Trade," SFB 649 Discussion Papers SFB649DP2005-055, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Aug 2005.
  2. Szabolcs Deák & Lionel Fontagné & Marco Maffezzoli & Massimiliano Marcellino, 2012. "The banking and distribution sectors in a small open economy DSGE Model," Working Papers 454, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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