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Endogenous Tradability and Macroeconomic Implications

Paul Bergin and Reuven Glick ()

No 9739, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: International macroeconomic models long have had difficulty explaining the surprisingly low volatility of the relative price between traded and nontraded goods compared to real exchange rates. This apparent puzzle may reflect a restrictive way of thinking about the nature of nontraded goods. Rather than imposing an artificial dichotomy between traded and nontraded, we regard all goods as parts of a single continuum, where the margin between traded and nontraded is endogenous. This implies that their prices are linked together via a marginal good and a new equilibrium condition. A simple and transparent model is used to demonstrate this approach, featuring a small open economy where differentiated goods are heterogeneous in terms of their iceberg trade costs. The paper goes on to find implications for other basic macroeconomic issues, such as limiting the potency of real exchange rate movements to correct large current account imbalances.

JEL-codes: F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-mac
Date: 2003-06
Note: IFM
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Published as Paul R. Bergin & Reuven Glick, 2009. "Endogenous tradability and some macroeconomic implications," Journal of Monetary Economics, vol 56(8), pages 1086-1095.

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