 Relative price riddles in international business cycle theory: Are transport costs the explanation?Elisabetta Mazzenga and Morten Ravn Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra Abstract: We study relative price behavior in an international business cycle model with specialization in production, in which a goods market friction is introduced through transport costs. The transport technology allows for flexible transport costs. We analyze whether this extension can account for the striking differences between theory and data as far as the moments of terms of trade and real exchange rates are concerned. We find that transport costs increase both the volatility of the terms of trade and the volatility of the real exchange rate. However, unless the transport technology is specified by a Leontief technology, transport costs do not resolve the quantitative discrepancies between theory and data. A surprising result is that transport costs may actually lower the persistence of the real exchange rate, a finding that is in contrast to much of the emphasis of the empirical literature. Keywords: International business cycles; terms of trade; real exchange rates; transport costs (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:312 Access Statistics for this paper More papers in Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra |
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