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

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  • Fazio, Giorgio
  • MacDonald, Ronald
  • Mélitz, Jacques

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5137.

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Date of creation: Jul 2005
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Handle: RePEc:cpr:ceprdp:5137

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Keywords: current account; Feldstein-Horioka puzzle; gravity model; home bias; puzzle; trade balance; trade costs;

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References

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Citations

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Cited by:
  1. Cipollina, Maria & Salvatici, Luca, 2006. "Reciprocal Trade Agreements in Gravity Models: A Meta-analysis," Working Papers 18877, TRADEAG - Agricultural Trade Agreements.
  2. 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.
  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. Martin Schmitz, 2014. "Financial remoteness and the net external position," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 150(1), pages 191-219, February.
  5. 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.
  6. 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.
  7. Holinski, Nils & Kool, Clemens J.M. & Muysken, Joan, 2012. "The impact of international portfolio composition on consumption risk sharing," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1715-1728.
  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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