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

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  • Giorgio Fazio
  • Ronald MacDonald
  • Jacques Melitz

Abstract

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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  • Giorgio Fazio & Ronald MacDonald & Jacques Melitz, 2008. "Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade," Open Economies Review, Springer, vol. 19(5), pages 557-578, November.
    • Handle: RePEc:kap:openec:v:19:y:2008:i:5:p:557-578
    DOI: 10.1007/s11079-008-9082-8
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    Cited by:

    1. Maria Cipollina & Luca Salvatici, 2010. "Reciprocal Trade Agreements in Gravity Models: A Meta‐Analysis," Review of International Economics, Wiley Blackwell, vol. 18(1), pages 63-80, February.
    2. Kai Konrad & Stergios Skaperdas, 2012. "The market for protection and the origin of the state," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(2), pages 417-443, June.
    3. Cardamone, Paola, 2007. "A Survey of the Assessments of the Effectiveness of Preferential Trade Agreements using Gravity Models," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 60(4), pages 421-473.
    4. Martin Schmitz, 2014. "Financial remoteness and the net external position," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(1), pages 191-219, February.
    5. 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.
    6. Joseph P. Byrne & Giorgio Fazio & Norbert Fiess, 2009. "The Global Side of the Investment‐Saving Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(5), pages 1033-1040, August.
    7. Luke Willard, 2007. "Trade Costs and Some Puzzles in International Macroeconomics," RBA Research Discussion Papers rdp2007-10, Reserve Bank of Australia.
    8. 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 (2002-2009) 2006-13, Groupement de Recherches Economiques et Sociales.
    9. 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.

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    More about this item

    Keywords

    Feldstein–Horioka puzzle; Trade costs; Gravity model; Home bias puzzle; Current account; Trade balance; F10; F32;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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