## Trade Costs, Market Integration, and Macroeconomic Volatility

_IMF Working Papers, March 1, 2003_

## Source details

**Canonical URL:** [Trade Costs, Market Integration, and Macroeconomic Volatility](https://www.imf.org/en/publications/wp/issues/2016/12/30/trade-costs-market-integration-and-macroeconomic-volatility-16307)

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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

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### 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

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## Content in this bundle

- **Trade Costs, Market Integration, and Macroeconomic Volatility - WP/03/54**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/trade-costs-market-integration-and-macroeconomic-volatility-16307_