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

Listed author(s):
  • Giorgio Fazio

    (Crest)

  • Ronald Mac Donald

    (Crest)

  • Jacques Melitz

    (Crest)

Registered author(s):

    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://crest.science/RePEc/wpstorage/2005-12.pdf
    File Function: Crest working paper version
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    Paper provided by Center for Research in Economics and Statistics in its series Working Papers with number 2005-12.

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    Length: 39
    Date of creation: 2005
    Handle: RePEc:crs:wpaper:2005-12
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