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.