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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Goods-Market Frictions and International Trade
Pawel Krolikowski
Andrew H. McCallum
Abstract

We present a tractable framework that embeds goods-market frictions in a general equilibrium dynamic model with heterogeneous exporters and identical importers. These frictions arise because it is time consuming and expensive for exporters and importers to meet. We show that search frictions lead to an endogenous fraction of unmatched exporters, alter the gains from trade, endogenize entry costs, and imply that the competitive equilibrium does not generally result in the socially optimal number of searching firms. Finally, ignoring search frictions results in biased estimates of the effect of tariffs on trade flows.


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Pawel Krolikowski & Andrew H. McCallum, Goods-Market Frictions and International Trade, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1207, 23 May 2017.
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Keywords: Search ; Trade ; Goods ; Frictions ; Information
DOI: 10.17016/IFDP.2017.1207
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