Interest Rates and World Trade: An 'Austrian' Perspective
This paper develops a framework to study the interplay between world trade and interest rates. The model incorporates an explicit notion of time and of production length, along the lines of the ‘Austrian’ tradition of Böhm-Bawerk (1889). Changes in the interest rate affect production lengths, labor productivity, and the financial costs of exporting. I decompose the response of the volume of world trade to changes in the interest rate into four components: (i) a labor productivity effect, (ii) a propensity to consume out of labor income effect, (iii) a temporal dimension of variable trade costs effect, and (iv) a selection into exporting effect.
This paper was written for the invited session on “Deglobalization? Revisiting the Links between Trade, Capital Flows, Supply Chains” at the 2023 AEA meetings in New Orleans. A shorter version of this paper is forthcoming in the American Economic Association Papers and Proceedings. I am grateful to Elhanan Helpman, Adrian Kulesza, Marc Melitz, and my discussant, Muhammed A. Yildirim, for very helpful comments and suggestions. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.