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Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade

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Author Info

  • Giorgio Fazio

    ()

  • Ronald MacDonald

    ()

  • Jacques Melitz

    ()

Abstract

In this paper we test the well-known hypothesis of Obstfeld and Rogoff (2000) that trade costs are the key to explaining the so-called Feldstein-Horioka puzzle. Using a gravity framework in an intertemporal context, we provide strong support for the hypothesis and we reconcile our results with the so-called home bias puzzle. Interestingly, this requires fundamental revision of Obstfeld and Rogoff’s argument. A further novelty of our work is in tying bilateral trade behaviour to desired aggregate trade balances and desired intertemporal trade.

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s11079-008-9082-8
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 19 (2008)
Issue (Month): 5 (November)
Pages: 557-578

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Handle: RePEc:kap:openec:v:19:y:2008:i:5:p:557-578

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Feldstein–Horioka puzzle; Trade costs; Gravity model; Home bias puzzle; Current account; Trade balance; F10; F32;

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References

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Citations

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Cited by:
  1. Konrad, Kai A. & Skaperdas, Stergios, 2012. "The market for protection and the origin of the state," Munich Reprints in Economics 13961, University of Munich, Department of Economics.
  2. Bertrand BLANCHETON (CMHE-IFReDE-GRES) & Samuel MAVEYRAUD-TRICOIRE (Université Bordeaux IV), 2006. "The indicators of international financial integration: A set of convergent measures (In French)," Cahiers du GRES 2006-13, Groupement de Recherches Economiques et Sociales.
  3. Cipollina, Maria & Salvatici, Luca, 2006. "Reciprocal Trade Agreements in Gravity Models: A Meta-analysis," Working Papers 18877, TRADEAG - Agricultural Trade Agreements.
  4. N. Holinski & C.J.M. Kool & J. Muysken, 2011. "The Impact of International Portfolio Composition on Consumption Risk Sharing," Working Papers 11-20, Utrecht School of Economics.
  5. Luke Willard, 2007. "Trade Costs and Some Puzzles in International Macroeconomics," RBA Research Discussion Papers rdp2007-10, Reserve Bank of Australia.
  6. Apergis, Nicholas & Tsoumas, Chris, 2009. "A survey of the Feldstein-Horioka puzzle: What has been done and where we stand," Research in Economics, Elsevier, vol. 63(2), pages 64-76, June.
  7. Cardamone, Paola, 2007. "A Survey of the Assessments of the Effectiveness of Preferential Trade Agreements using Gravity Models," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 60(4), pages 421-473.

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