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Trade Costs and the Open Macroeconomy

  • Novy, Dennis

    (University of Warwick)

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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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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Web page: http://www2.warwick.ac.uk/fac/soc/economics/

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  1. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports 124, Federal Reserve Bank of New York.
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  18. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  19. Carolyn L. Evans, 2001. "Home bias in trade: location or foreign-ness?," Staff Reports 128, Federal Reserve Bank of New York.
  20. Reuven Glick & Paul Bergin, 2003. "Endogenous Nontradability and Macroeconomic Implications," Computing in Economics and Finance 2003 106, Society for Computational Economics.
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  23. repec:rus:hseeco:122183 is not listed on IDEAS
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