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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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  1. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report, Federal Reserve Bank of Minneapolis 223, Federal Reserve Bank of Minneapolis.
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  23. repec:rus:hseeco:122183 is not listed on IDEAS
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Cited by:
  1. World Bank, 2014. "Trading Up to High Income : Turkey Country Economic Memorandum," World Bank Other Operational Studies 19320, The World Bank.
  2. Tervala, Juha, 2013. "Learning by devaluating: A supply-side effect of competitive devaluation," International Review of Economics & Finance, Elsevier, Elsevier, vol. 27(C), pages 275-290.
  3. Toke Aidt & Peter S. Jensen, 2011. "Workers of the World, Unite! Franchise Extensions and the Threat of Revolution in Europe, 1820-1938," CESifo Working Paper Series 3417, CESifo Group Munich.
  4. Munasib, Abdul & Roy, Devesh, 2013. "Nontariff Barriers as Bridge to Cross," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C., Agricultural and Applied Economics Association 149680, Agricultural and Applied Economics Association.
  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, Elsevier, vol. 33(C), pages 81-102.
  6. 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, Elsevier, vol. 30(7), pages 1303-1322.

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