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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 tradecosts are the key to explaining the so-called Feldstein-Horioka puzzle. Using a gravityframework in an intertemporal context, we provide strong support for the hypothesis and wereconcile our results with the so-called home bias puzzle. Interestingly, this requires a fundamentalrevision of Obstfeld and Rogoff’s argument. A further novelty of our work is in tyingbilateral trade behavior to desired aggregate trade balances and desired intertemporaltrade.

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

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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. Cardamone, Paola, 2007. "A survey of the assessments of the effectiveness of Preferential Trade Agreements using gravity models," Working Papers 7282, TRADEAG - Agricultural Trade Agreements.
  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. Kai Konrad & Stergios Skaperdas, 2012. "The market for protection and the origin of the state," Economic Theory, Springer, vol. 50(2), pages 417-443, June.
  4. Cipollina, Maria & Salvatici, Luca, 2007. "Reciprocal trade agreements in gravity models: a meta-analysis," Economics & Statistics Discussion Papers esdp07035, University of Molise, Dept. EGSeI.
  5. Martin Schmitz, 2014. "Financial remoteness and the net external position," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 150(1), pages 191-219, February.
  6. Luke Willard, 2007. "Trade Costs and Some Puzzles in International Macroeconomics," RBA Research Discussion Papers rdp2007-10, Reserve Bank of Australia.
  7. 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.
  8. 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.

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