Adjustment Dynamics of Bilateral Trade Flows: Theory and Evidence
AbstractIn this paper, I introduce a trade-promoting "invisible asset" into the standard Krugman (1980) model of international trade. It can be interpreted as trust that accumulates as an externality in proportion to successful international transactions. I use this framework to theoretically derive a dynamic gravity equation and to discuss adjustment dynamics. I provide new evidence on adjustment rates of bilateral trade flows. On average, 23% of the gap to the steady-state trade flow are closed each year. However, dynamic regressions yield long-run trade policy effects which are comparable to static estimates.
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Bibliographic InfoArticle provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.
Volume (Year): 145 (2009)
Issue (Month): IV (December)
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International bilateral trade; Gravity model; Trust; Dynamic panel data;
Find related papers by JEL classification:
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
- F15 - International Economics - - Trade - - - Economic Integration
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- Jung, Benjamin, 2012. "Gradualism and dynamic trade adjustment: Revisiting the pro-trade effect of free trade agreements," Economics Letters, Elsevier, vol. 115(1), pages 63-66.
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