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Disaggregated Trade Flows and the “Missing Globalization Puzzle”

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Abstract

This study analyzes the stability of the distance coefficient values over time in the generalized gravity equation of Bergstrand (1989) using both aggregate and disaggregated trade flows among 22 OECD countries recorded for the sample period covering 1970 until 2000. We estimate the gravity equation both in its traditional form as well as by taking into account multilateral resistance as suggested in Baier and Bergstrand (2007). First of all, we find that the missing globalization puzzle, typically observed in empirical gravity models for aggregate trade flows, largely disappears when one estimates a gravity model using disaggregated trade data at the level of individual industries. Secondly, we document that accounting for multilateral price resistance alone can provide some evidence against the missing globalization puzzle. At the same time, the results obtained for a traditional specification of the gravity equation emphasizing the importance of disaggregated trade flows in explaining the distance puzzle remain largely intact. We also illustrate how the aggregation bias could have contributed to a typical finding of a non-declining trade-deterring role of distance in the existing literature.

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Bibliographic Info

Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 08-209.

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Length: 23 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:kof:wpskof:08-209

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Keywords: Gravity model; missing globalization puzzle; distance coefficient; multilateral resistance;

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  1. Gabriel J. Felbermayr & Wilhelm Kohler, 2006. "Exploring the Intensive and Extensive Margins of World Trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 142(4), pages 642-674, December.
  2. David T Coe & Arvind Subramanian & Natalia T Tamirisa, 2007. "The Missing Globalization Puzzle: Evidence of the Declining Importance of Distance," IMF Staff Papers, Palgrave Macmillan, vol. 54(1), pages 34-58, May.
  3. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
  4. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier.
  5. Anne-Célia Disdier & Keith Head, 2004. "The Puzzling Persistence of the Distance Effect on Bilateral Trade," Development Working Papers 186, Centro Studi Luca d\'Agliano, University of Milano.
  6. Jonathan Eaton & Akilo Tamura, 1994. "Bilateralism and Regionalism in Japanese and U.S. Trade and Direct Foreign Investment Patterns," Boston University - Institute for Economic Development, Boston University, Institute for Economic Development 48, Boston University, Institute for Economic Development.
  7. Berthelon, Matias & Freund, Caroline, 2008. "On the conservation of distance in international trade," Journal of International Economics, Elsevier, Elsevier, vol. 75(2), pages 310-320, July.
  8. Jean-François Brun & Céline Carrère & Patrick Guillaumont & Jaime de Melo, 2005. "Has Distance Died? Evidence from a Panel Gravity Model," World Bank Economic Review, World Bank Group, World Bank Group, vol. 19(1), pages 99-120.
  9. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
  10. Buch, Claudia M. & Kleinert, Jorn & Toubal, Farid, 2004. "The distance puzzle: on the interpretation of the distance coefficient in gravity equations," Economics Letters, Elsevier, Elsevier, vol. 83(3), pages 293-298, June.
  11. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, American Economic Association, vol. 69(1), pages 106-16, March.
  12. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  13. Dieter Schumacher & Boriss Siliverstovs, 2006. "Home-Market and Factor-Endowment Effects in a Gravity Approach," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 142(2), pages 330-353, July.
  14. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  15. Rikhil Bhavnani & Natalia T. Tamirisa & Arvind Subramanian & David T. Coe, 2002. "The Missing Globalization Puzzle," IMF Working Papers 02/171, International Monetary Fund.
  16. Feenstra, Robert C, 2002. "Border Effects and the Gravity Equation: Consistent Methods for Estimation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(5), pages 491-506, December.
  17. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-53, February.
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Cited by:
  1. MARKIANIDOU, Paresa & WEEREN, Arie, 2011. "Linear and non linear growth models using mixed modeling: An application on European import volumes," Working Papers 2011011, University of Antwerp, Faculty of Applied Economics.
  2. Lin, Faqin, 2013. "Are distance effects really a puzzle?," Economic Modelling, Elsevier, Elsevier, vol. 31(C), pages 684-689.
  3. Bassem Kahouli & Anis Omri & Anissa Chaibi, 2014. "Environmental Regulations, Trade, and Foreign Direct Investment: Evidence from Gravity Equations," Working Papers, Department of Research, Ipag Business School 2014-189, Department of Research, Ipag Business School.

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