Goods-Market Frictions and International Trade
||Revisions: WP 16-35R|
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 takes time and expense 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.
Keywords: Search, trade, goods, frictions, information.
JEL codes: D83, F12.
Suggested citation: Krolikowski, Pawel M., and Andrew H. McCallum, “Goods-Market Frictions and International Trade.” 2016. Federal Reserve Bank of Cleveland, Working Paper no. 16-35.