8 - International Trade Costs, Home Bias and Europe's Single Markets

Wetenschappelijke publicatie
Publicatiedatum 1 oktober 2001

This paper incorporates international trade costs in Obstfeld and Rogoff’s (1995) model. This extension introduces an endogenous home bias in consumer spending. I show that small trading costs may cause a large home bias. Moreover, tradings costs in the goods market can explain seemingly excessive short-run exchange rate volatility. Finally, the Single Market (declining costs of international trade) will reduce the home bias in consumption. I show that, as a result, monetary policy becomes less powerful in terms of affecting consumption, but better able to influence the general price level.