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The geography of trade in goods and asset holdings

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  • Antonin Aviat

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

  • Nicolas Coeurdacier

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

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

Suggested Citation

  • Antonin Aviat & Nicolas Coeurdacier, 2007. "The geography of trade in goods and asset holdings," SciencePo Working papers Main hal-01045223, HAL.
    • Handle: RePEc:hal:spmain:hal-01045223
    DOI: 10.1016/j.jinteco.2006.02.002
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01045223
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    References listed on IDEAS

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