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The Distance Effect in Banking and Trade

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  • Michael Brei
  • Goetz von Peter

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.

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  • Michael Brei & Goetz von Peter, 2017. "The Distance Effect in Banking and Trade," BIS Working Papers 658, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:658
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    References listed on IDEAS

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    3. Avdjiev, Stefan & Koch, Cathérine & McGuire, Patrick & von Peter, Goetz, 2018. "Transmission of monetary policy through global banks: Whose policy matters?," Journal of International Money and Finance, Elsevier, vol. 89(C), pages 67-82.
    4. Mr. Eugenio M Cerutti & Catherine Koch & Swapan-Kumar Pradhan, 2020. "Banking Across Borders: Are Chinese Banks Different?," IMF Working Papers 2020/249, International Monetary Fund.
    5. Junaid Ahmed & Mazhar Mughal & Inmaculada Martínez‐Zarzoso, 2021. "Sending money home: Transaction cost and remittances to developing countries," The World Economy, Wiley Blackwell, vol. 44(8), pages 2433-2459, August.
    6. Norring, Anni, 2019. "Macroprudential policy spillovers and international banking - Taking the gravity approach," ESRB Working Paper Series 101, European Systemic Risk Board.
    7. Galema, R. & Koetter, M., 2018. "Big fish in small banking ponds? Cost advantage and foreign affiliate presence," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 138-158.
    8. Cote, Christine & Estrin, Saul & Shapiro, Daniel, 2020. "Expanding the international trade and investment policy agenda: the role of cities and services," LSE Research Online Documents on Economics 104003, London School of Economics and Political Science, LSE Library.
    9. Broner,Fernando & Didier Brandao,Tatiana & Schmukler,Sergio L. & von Peter,Goetz, 2020. "Bilateral International Investments : The Big Sur ?," Policy Research Working Paper Series 9501, The World Bank.
    10. Mr. Eugenio M Cerutti & Haonan Zhou, 2018. "The Global Banking Network: What is Behind the Increasing Regionalization Trend?," IMF Working Papers 2018/046, International Monetary Fund.
    11. Yavuz Arslan & Juan Contreras & Nikhil Patel & Chang Shu, 2018. "Globalisation and deglobalisation in emerging market economies: facts and trends," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation and deglobalisation, volume 100, pages 1-25, Bank for International Settlements.
    12. Lee, Chien-Chiang & Wang, Chih-Wei & Ho, Shan-Ju, 2020. "Financial innovation and bank growth: The role of institutional environments," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    13. Welfens Paul J.J. & Baier Fabian & Kadiric Samir & Korus Arthur & Xiong Tian, 2019. "EU28 Capital Market Perspectives of a Hard BREXIT: Theory, Empirical Findings and Policy Options," The Economists' Voice, De Gruyter, vol. 16(1), pages 1-16, December.
    14. Christine Côté & Saul Estrin & Daniel Shapiro, 0. "Expanding the international trade and investment policy agenda: The role of cities and services," Journal of International Business Policy, Palgrave Macmillan, vol. 0, pages 1-25.
    15. Sylvia Klosin, 2021. "Automatic Double Machine Learning for Continuous Treatment Effects," Papers 2104.10334, arXiv.org.
    16. Tara Rice & Goetz von Peter & Codruta Boar, 2020. "On the global retreat of correspondent banks," BIS Quarterly Review, Bank for International Settlements, March.
    17. Francesco Marchionne & Evelina Lazareva, 2019. "The limits to integration before and after the great financial crisis," Economics Bulletin, AccessEcon, vol. 39(2), pages 838-844.
    18. Christine Côté & Saul Estrin & Daniel Shapiro, 2020. "Expanding the international trade and investment policy agenda: The role of cities and services," Journal of International Business Policy, Palgrave Macmillan, vol. 3(3), pages 199-223, September.
    19. Rasoulinezhad, Ehsan, 2020. "Energy Trade and Economic Integration between the Commonwealth Independent States and China," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 35(1), pages 172-190.

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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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