Globalization, markups and the natural rate of interest

Abstract

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.globalization, natural interest rate, trade costs