History, culture, and trade: a dynamic gravity approach

What determines trade patterns? Habit persistence in consumer tastes and learning-by-doing in production imply that history and culture are key determinants. Deriving a dynamic gravity equation from a simple model, it is shown that cultural similarity is a product of history, so that trade patterns are a function of bilateral GDP, current trade costs, and the past history of trade costs. Using a trade data set which spans from 1870 to 2000, it is shown that many gravity variables operate via lagged trade, that historical trade shocks matter, and that trade patterns are persistent, even across centuries.