The Library

Trade costs and the open macroeconomy

Tools

Novy, Dennis (2006) Trade costs and the open macroeconomy. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.778).

Preview

PDF
WRAP_Novy_twerp_778.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Download (304Kb)

Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...

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.

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HF Commerce

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

International trade, Price indexes, Foreign exchange rates, Macroeconomics, Consumption (Economics)

Series Name:

Warwick economic research papers

Publisher:

University of Warwick, Department of Economics

Place of Publication:

Coventry

Official Date:

14 November 2006

Dates:

Date	Event
14 November 2006	Published

Number:

No.778

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

References:

Anderson, J., van Wincoop, E., 2004. Trade Costs. Journal of Economic Literature 42, pp. 691-751.
Atkeson, A., Burstein, A., 2006. Pricing to Market, Trade Costs, and International Relative Prices. Mimeo, University of California at Los Angeles.
Bacchetta, P., van Wincoop, E., 2003. Why Do Consumer Prices React Less Than Import Prices to Exchange Rates? Journal of the European Economic Association 1, pp. 662-670.
Backus, D., Kehoe, P., Kydland, F., 1992. International Real Business Cycles. Journal of Political Economy 100, pp. 745-775.
Backus, D., Smith, G., 1993. Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods. Journal of International Economics 35, pp. 297-316.
Bergin, P., Glick, R., 2006. Endogenous Tradability and Macroeconomic Implications. Mimeo, University of California at Davis.
Betts, C., Devereux, M., 2000. Exchange Rate Dynamics in a Model of Pricing to Market. Journal of International Economics 50, pp. 215-244.
Brunner, A., Naknoi, K., 2003. Trade Costs, Market Integration, and Macroeconomic Volatility. IMF Working Paper No. 54 (March).
Burstein, A., Neves, J., Rebelo, S., 2003. Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations. Journal of Monetary Economics 50, pp. 1189-1214.
Chari, V., Kehoe, P., McGrattan, E., 2002. Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates? Review of Economic Studies 69, pp. 533-563.
Corsetti, G., Pesenti, P., 2005. International Dimensions of Optimal Monetary Policy. Journal of Monetary Economics 52, pp. 281-305.
Devereux, M., 2000. How Does a Devaluation Affect the Current Account? Journal of International Money and Finance 19, pp. 833-851.
Engel, C., 1999. Accounting for U.S. Real Exchange Rate Changes. Journal of Political Economy 107, pp. 507-538.
Evans, C., 2001. Home Bias in Trade: Location or Foreign-ness? Federal Reserve Bank of New York Staff Report No. 128.
Fender, J., Yip, C., 2000. Tariffs and Exchange Rate Dynamics Redux. Journal of International Money and Finance 19, pp. 633-655.
Hau, H., 2000. Exchange Rate Determination: The Role of Factor Price Rigidities and Non-tradeables. Journal of International Economics 50, pp. 421-447.
Krugman, P., 1980. Scale Economies, Product Differentiation, and the Pattern of Trade. American Economic Review 70, pp. 950-959.
Obstfeld, M., Rogoff, K., 1995. Exchange Rate Dynamics Redux. Journal of Political Economy 103, pp. 624-660.
Obstfeld, M., Rogoff, K., 2000. The Six Major Puzzles in International Macroeconomics: Is There a Common Cause? In: NBER Macroeconomics Annual 15.
Ravn, M., Mazzenga, E., 2004. International Business Cycles: The Quantitative Role of Transportation Costs. Journal of International Money and Finance 23, pp. 645-671.
Warnock, F., 2003. Exchange Rate Dynamics and the Welfare Effects of Monetary Policy in a Two-Country Model with Home-Product Bias. Journal of International Money and Finance 22, pp. 343-363.