Knowledge that Transforms

Productive factors such as human and phyaical capital are accumulated and trade can affect the steady-state levels of such factors. Consequently, trade liberalization will have dynamic effects on output and welfare as the economy moves to its new steady state, in addition to its usual static effects. The output impact of this dynamic effect is measurable and appears to be quite large. The welfare impact of this dynamic effect is also measurable. The size of this dynamic gain from trade depends on the importance of external scale economies.

We study the monetary theory implications of fixed costs associated with trade in private assets. We show that with heterogeneous endowment profiles it is possible for an endogenous subset of agents to hold currency even when it is dominated in return by a competing asset. With respect to positive issues in monetary theory, the model implies that changes in the steady-state growth rate of the money supply have a negative effect on real interest rates because of endogenous market participation measures. On the normative side, we show that there may be an equity-efficiency trade-off from monetary deflation.