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The distance effect in banking and trade

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  • Brei, Michael
  • von Peter, Goetz

Abstract

The empirical gravity literature finds geographical distance to be a large and growing obstacle to trade, contradicting the popular notion that globalization heralds “the end of geography”. This distance puzzle disappears, however, when measuring the effect of cross-border distance relative to that of domestic distance (Yotov, 2012). We uncover the same result for banking when comparing cross-border positions with domestic credit, using the most extensive dataset on global bank linkages between countries. The role of distance remains substantial for trade as well as for banking where transport cost is immaterial – pointing to the role of information frictions as a common driver. A second contribution is to show that the forces of globalization are also evident in other, less prominent, parts of the gravity framework.

Suggested Citation

  • Brei, Michael & von Peter, Goetz, 2018. "The distance effect in banking and trade," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 116-137.
  • Handle: RePEc:eee:jimfin:v:81:y:2018:i:c:p:116-137
    DOI: 10.1016/j.jimonfin.2017.10.002
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    More about this item

    Keywords

    Globalization; Gravity framework; Distance; International trade; International banking;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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