Endogenous Tradability and Macroeconomic Implications

41 Pages Posted: 7 Jun 2003 Last revised: 2 Nov 2010

See all articles by Paul R. Bergin

Paul R. Bergin

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies

Date Written: June 2003

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.

Suggested Citation

Bergin, Paul R. and Glick, Reuven, Endogenous Tradability and Macroeconomic Implications (June 2003). NBER Working Paper No. w9739. Available at SSRN: https://ssrn.com/abstract=414740

Paul R. Bergin (Contact Author)

University of California, Davis - Department of Economics ( email )

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Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies ( email )

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415-974-2168 (Fax)

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