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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)

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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Paper provided by Centre de Recherche en Economie et Statistique 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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  12. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
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  23. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-564, September.
  24. Alan M. Taylor, 2002. "A Century of Current Account Dynamics," NBER Working Papers 8927, National Bureau of Economic Research, Inc.
  25. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2006. "Trading Partners and Trading Volumes," DEGIT Conference Papers c011_022, DEGIT, Dynamics, Economic Growth, and International Trade.
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