Endogenoustradabilityandsomemacroeconomicimplications

While nontradedgoodsplayanimportantroleinmanyopeneconomymacroeconomic models,thesemodelshavedifficultyexplainingthelowvolatilityintherelativepriceof nontradedgoods.Incontrasttomacroeconomicconvention,thispaperarguesthatthe shareofnontradedgoodsisendogenous,atime-varyingproductofmacroeconomic shocksandtradecoststhatareheterogeneousacrossgoods.Asimpleopeneconomy modeldemonstratesthattradecostheterogeneityandatime-varyingmarginof tradednessdramaticallyreducesthevolatilityofnontradedprices.Thisalsoreducesthe abilityofrealexchangerateadjustmentstodampencurrentaccountimbalances