Three essays on economic effects of trade costs

This dissertation is a set of three essays on effects of trade costs. The first one empirically studies the sectoral decomposition of the volatility of real exchange rates for a broad cross section of countries. For this purpose, goods are classified as being traded or nontraded in export markets. The relative price of nontraded goods is found to be relatively more important in movements of real exchange rates of the country pairs that maintain stable nominal exchange rates. To suggest an explanation for that, the second essay proposes a model with endogenous tradability. The key features of the model are heterogeneous productivity, transport costs, and sticky wages. The nontraded sector arises from non-zero trade costs. The relative price of goods depends on productivity, transport costs, and in the short run, on the exchange rate regime. The calibration shows that the relative price of nontraded goods makes a much greater contribution to overall real exchange rate volatility under a fixed exchange rate regime than a flexible regime, as in the data. The last essay draws on the impact of protection on the American pig iron industry in 1870--1940. I provide evidence that imported and domestic pig iron are perfect substitutes. Then I estimate a demand and supply system and simulate a hypothetical situation, in which the United States removed the duty on pig iron in 1870. I find that a substantial part of the American pig iron industry could not have survived, if the United States had moved to a free trade regime in 1870. Finally, I provide empirical evidence that there existed dynamic learning effects behind the tariff wall. Without protection, the import market share could be as high as 42 percent.