DP3530 | International Business Cycles: The Quantitative Role of Transportation Costs

Publication Date

20/09/2002

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Abstract

We evaluate the quantitative effects of introducing costs of transporation into an international trade model. We model these costs through the introduction of international transportation services sector. Costs of transportation have substantial long-run effects on welfare and may impact on the pattern of trade. However, business cycle effects on relative price movements and on international comovements are less pertinent since decreased trade volatility counteracts the effects of transportation cost variations. Nevertheless, it is also shown that costs of transportation combined with delivery lags go a long way towards resolving, in particular, the international comovement puzzle.