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Trade Costs and the Open Macroeconomy

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  • Novy, Dennis

    (University of Warwick)

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 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.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_778.pdf
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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 778.

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Length: 36 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:wrk:warwec:778

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Keywords: Trade Costs ; New Open Economy Macroeconomics ; Pricing to Market ; Exchange Rates ; Consumption Correlations;

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References

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  1. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
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  8. Giancarlo Corsetti & Paolo Pesenti, 2001. "International Dimensions of Optimal Monetary Policy," NBER Working Papers 8230, National Bureau of Economic Research, Inc.
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  10. Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
  11. Andrew Atkeson & Ariel Burstein, 2008. "Pricing-to-Market, Trade Costs, and International Relative Prices," American Economic Review, American Economic Association, vol. 98(5), pages 1998-2031, December.
  12. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations," RCER Working Papers 473, University of Rochester - Center for Economic Research (RCER).
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  16. John Fender & Chong K. Yip, 1998. "Tariffs and Exchange Rate Dynamics Redux," Departmental Working Papers _105, Chinese University of Hong Kong, Department of Economics.
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  18. Carolyn L. Evans, 2001. "Home bias in trade: location or foreign-ness?," Staff Reports 128, Federal Reserve Bank of New York.
  19. repec:rus:hseeco:122183 is not listed on IDEAS
  20. Paul R. Bergin & Reuven Glick, 2005. "Endogenous nontradability and macroeconomic implications," Working Paper Series 2003-09, Federal Reserve Bank of San Francisco.
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Citations

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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. 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.
  3. Aidt, Toke S. & Jensen, Peter S., 2010. "Workers of the world, unite! Franchise extensions and the threat of revolution in Europe, 1820-1938," Discussion Papers of Business and Economics 7/2010, Department of Business and Economics, University of Southern Denmark.
  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. 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.

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