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The geography of trade in goods and asset holdings

Listed author(s):
  • Antonin Aviat

    (DELTA - Département et Laboratoire d'Economie Théorique et Appliquée - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

  • Nicolas Coeurdacier

    ()

    (ECON - Département d'économie - Sciences Po)

Registered author(s):

    Gravity models have been widely used to describe bilateral trade in goods. Portes and Rey [Portes, R., Rey, H., 2005. The Determinants of Cross-Border Equity Flows. Journal of International Economics, 65(2), 269-296.] applied this framework to cross-border equity flows and found that distance, which proxies information asymmetries, is a surprisingly very large barrier to cross-border asset trade. We adopt a different point of view and explore the complementarity between bilateral trade in goods and bilateral asset holdings in a simultaneous gravity equations framework. Providing different instruments for both endogenous variables, we show that a 10% increase in bilateral trade raises bilateral asset holdings by 6% to 7%. The reverse causality is also significant, albeit smaller. Controlling for trade, the impact of distance on asset holdings is drastically reduced. Keywords: Gravity models; International finance; International trade; Simultaneous equations

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    File URL: https://hal-sciencespo.archives-ouvertes.fr/hal-01045223/document
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    Paper provided by HAL in its series Post-Print with number hal-01045223.

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    Date of creation: Mar 2007
    Publication status: Published in Journal of International Economics, Elsevier, 2007, pp.22-51
    Handle: RePEc:hal:journl:hal-01045223
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-01045223
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    2. Portes, Richard & Rey, Helene, 2005. "The determinants of cross-border equity flows," Journal of International Economics, Elsevier, vol. 65(2), pages 269-296, March.
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