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Trade Costs and the Open Macroeconomy

  • Dennis Novy

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 allows for different degrees of exchange rate pass-through. Trade costs are shown to create an endogenous home bias in consumption and the model performs well in matching empirical trade shares for OECD countries. In addition, trade costs reduce cross-country output and consumption correlations, and they magnify exchange rate volatility. Trade costs turn a monetary expansion into a beggar-thy-neighbor policy. Copyright © The editors of the "Scandinavian Journal of Economics" 2010 .

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Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 112 (2010)
Issue (Month): 3 (09)
Pages: 514-545

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Handle: RePEc:bla:scandj:v:112:y:2010:i:3:p:514-545
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