Trade Costs and the Open Macroeconomy

Dennis Novy

Scandinavian Journal of Economics, 2010, vol. 112, issue 3, 514-545

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 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.

Date: 2010
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Citations: View citations in EconPapers (7)

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https://doi.org/10.1111/j.1467-9442.2010.01612.x

Related works:
Working Paper: Trade Costs and the Open Macroeconomy (2006)
Working Paper: Trade Costs and the Open Macroeconomy (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:scandj:v:112:y:2010:i:3:p:514-545

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