Working Paper
Goods-Market Frictions and International Trade
Abstract: We add goods-market frictions to a general equilibrium dynamic model with heterogeneous exporting producers and identical importing retailers. Our tractable framework leads to endogenously unmatched producers, which attenuate welfare responses to foreign shocks but increase the trade elasticity relative to a model without search costs. Search frictions are quantitatively important in our calibration, attenuating welfare responses to tariffs by 40 percent and increasing the trade elasticity by 50 percent. Eliminating search costs raises welfare by 1 percent and increasing them by only a few dollars has the same effects on welfare and trade flows as a 10 percent tariff.
Keywords: trade; Search; constrained optimization; welfare;
JEL Classification: C61; D83; F12;
https://doi.org/10.26509/frbc-wp-201635r2
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https://doi.org/10.26509/frbc-wp-201635r2
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Bibliographic Information
Provider: Federal Reserve Bank of Cleveland
Part of Series: Working Papers
Publication Date: 2019-08-01
Number: 16-35R2
Note: This is the second revision of the paper. The first version was published in December 2016 and the second version in September 2018.