Abstract
I develop a framework to study the interplay between world trade and interest rates. The model incorporates an explicit notion of time and production length, in the “Austrian” tradition of Bohm-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: a labor productivity effect, a “propensity to consume out of labor income” effect, a “temporal dimension of variable trade costs” effect, and a “selection into exporting” effect.
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