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

  • Giorgio Fazio

    ()

  • Ronald MacDonald

    ()

  • Jacques Melitz

    ()

In this paper we test the well-known hypothesis of Obstfeld and Rogoff (2000) that tradecosts are the key to explaining the so-called Feldstein-Horioka puzzle. Using a gravityframework in an intertemporal context, we provide strong support for the hypothesis and wereconcile our results with the so-called home bias puzzle. Interestingly, this requires a fundamentalrevision of Obstfeld and Rogoff’s argument. A further novelty of our work is in tyingbilateral trade behavior to desired aggregate trade balances and desired intertemporaltrade.

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File URL: http://hdl.handle.net/10.1007/s11079-008-9082-8
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 19 (2008)
Issue (Month): 5 (November)
Pages: 557-578

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Handle: RePEc:kap:openec:v:19:y:2008:i:5:p:557-578
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