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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. Cipollina, Maria & Salvatici, Luca, 2006. "Reciprocal Trade Agreements in Gravity Models: A Meta-analysis," Working Papers 18877, TRADEAG - Agricultural Trade Agreements.
  3. Konrad, Kai A & Skaperdas, Stergios, 1999. "The Market for Protection and the Origin of the State," CEPR Discussion Papers 2173, C.E.P.R. Discussion Papers.
  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. 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.
  6. Martin Schmitz, 2014. "Financial remoteness and the net external position," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 150(1), pages 191-219, February.
  7. 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.
  8. Luke Willard, 2007. "Trade Costs and Some Puzzles in International Macroeconomics," RBA Research Discussion Papers rdp2007-10, Reserve Bank of Australia.

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