DP3530 International Business Cycles: The Quantitative Role of Transportation Costs

Author(s): Elisabetta Mazzenga, Morten O Ravn
Publication Date: September 2002
Keyword(s): costs of transportation, delivery lags, home-bias in trade, international business cycles, international comovements, real exchange rates, terms of trade
JEL(s): E32, F31, F41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3530

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.