Globalization, markups and the natural rate of interest
Jean-Marc Natal and Dr. Nicolas Stoffels
Issue
2007-14
Pages
37
JEL classification
E43,
F15,
F41,
F49
Keywords
globalization,
natural interest rate,
trade costs
Year
2007
In this paper, we investigate how, in a stylised theoretical framework, an increase in the degree of globalization - modelled as a deline in trade costs - affects the real natural rate of interest by impacting firms markups. Outlining a two- country dynamic general equilibrium model with endogenous elasticity of substitution between goods, we suggest two main propositions: 1) Globalization - via the impplied variation in markups - has a potentially significant impact on the natural rate of interest. 2) Simple, plausible markup dynamics may have contributed to explain the recent "conundrum" of world interest rates.