Trade Costs, Market Integration, and Macroeconomic Volatility

IMF Working Papers, March 1, 2003

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Trade Costs, Market Integration, and Macroeconomic Volatility

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Bibliographic details

• Authors: Kanda Naknoi, Allan D. Brunner
• Published: March 1, 2003
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451847536.001

Overview

• Paper examines the effects of trade costs on macroeconomic volatility.
• Constructs a dynamic, two-country general equilibrium model where market integration depends directly on trade costs (transport costs, tariffs, etc.).
• Model is an extension of Obstfeld and Rogoff (1995).
• Reduction in trade costs -> more market integration as the relative price of foreign goods falls and households increase consumption of imported goods.
• Empirical findings provide mixed support for the model's predictions.

Model and Mechanisms

• Framework: dynamic, two-country general equilibrium model (extension of Obstfeld and Rogoff (1995)).
• Market integration channel: degree of market integration depends directly on trade costs (transport costs, tariffs, etc.).
• Behavioral response: lower trade costs reduce the relative price of foreign goods and raise household consumption of imported goods.

Key Predictions and Theoretical Findings

• With more market integration:
  • Variability of the real exchange rate should fall.
  • Variability of the trade balance should increase.
• Trade costs have ambiguous effects on the volatility of other macro variables, such as income and consumption.

Empirical Findings

• The paper presents empirical findings that provide mixed support for the model's predictions.

Subject Areas and Keywords

• Subject: Consumption, Foreign exchange, International trade, National accounts, Real exchange rates, Tariffs, Taxes, Trade balance, Transportation
• Keywords: aggregate demand, changes steady-state, Consumption, effective tariff rate, exchange rate, Global, globalization, iceberg-cost setup, market integration, Real exchange rates, relative prices, tariffs, Trade balance, trade cost, transport cost, transport costs, Transportation, WP

Content in this bundle

• Trade Costs, Market Integration, and Macroeconomic Volatility - WP/03/54
  • Trade Costs, Market Integration, and Macroeconomic Volatility - WP/03/54 (Markdown version)
  • Trade Costs, Market Integration, and Macroeconomic Volatility - WP/03/54 (PDF)