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

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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:	36
Institution:	University of Warwick
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access

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