Trade Costs and the Open Macroeconomy

Dennis Novy

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

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.

Keywords: Trade Costs; New Open Economy Macroeconomics; Pricing to Market; Exchange Rates; Consumption Correlations (search for similar items in EconPapers)
JEL-codes: F12 F31 F41 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2006
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://warwick.ac.uk/fac/soc/economics/research/w ... s/2008/twerp_778.pdf

Related works:
Journal Article: Trade Costs and the Open Macroeconomy (2010)
Working Paper: Trade Costs and the Open Macroeconomy (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:778

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