This paper argues that bilateral spatial price models do not estimate bilateral transactions costs when trade with third cities is important. The paper examines trans-Atlantic gold arbitrage during the gold standard era by assembling a database indicating when trans-Atlantic gold shipments occurred. It shows that two-way gold shipments between New York and London frequently occurred prior to 1901. However, in 1901 gold shipments to London ceased and were replaced by triangular arbitrage shipments through Paris. Consequently, New York and London gold price data cannot be used to estimate New York-London transactions costs after 1901, as no trade took place.
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Fackler, Paul L. & Goodwin, Barry K., 2001.
"Spatial price analysis,"
Handbook of Agricultural Economics,
in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 17, pages 971-1024
Elsevier.
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