Productivity and consumption home bias with goods market frictions

Abstract

This paper analyzes the effect of productivity gains on the consumption home bias when goods market frictions are present in the form of time costs. We find that productivity gains may either improve or worsen the home bias, depending on the relative magnitude of the terms of trade, the domestic friction, and the international friction. Our results broaden the interpretation of home bias by providing unique theoretical insight into the role of the interaction between productivity innovations and goods market frictions.