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Federal Reserve Bank of Cleveland
Working Papers (New Series)
Goods-Market Frictions and International Trade
Pawel Krolikowski
Andrew H. McCallum

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.

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Pawel Krolikowski & Andrew H. McCallum, Goods-Market Frictions and International Trade, Federal Reserve Bank of Cleveland, Working Papers (New Series) 163501, 23 Dec 2016, revised 11 Sep 2018.
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Note: Revision of Working Paper 16-35 originally published in December of 2016
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Keywords: Trade; Frictions
DOI: 10.26509/frbc-wp-201635r
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