International Finance Discussion Papers (IFDP)

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May 2017

Goods-Market Frictions and International Trade

Pawel M. Krolikowski and 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.
Accessible materials (.zip)

Keywords: Search, trade, goods, frictions, information

DOI: https://doi.org/10.17016/IFDP.2017.1207

PDF: Full Paper

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Last Update: January 09, 2020