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

Giorgio Fazio, Ronald MacDonald () and Jacques Melitz

No 5137, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we test the well-known hypothesis of Obstfeld and Rogoff (2000) that trade costs are the key to explaining the so-called Feldstein-Horioka puzzle. Using a gravity framework in an intertemporal context, we provide strong support for the hypothesis and we reconcile our results with the so-called home bias puzzle. Interestingly, this requires fundamental revision of Obstfeld and Rogoff’s argument. A further novelty of our work is in tying bilateral trade behaviour to desired aggregate trade balances and desired intertemporal trade.

Keywords: current account; Feldstein-Horioka puzzle; gravity model; home bias; puzzle; trade balance; trade costs (search for similar items in EconPapers)
JEL-codes: F10 F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-sea
Date: 2005-07
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Related works:
Working Paper: Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade (2005)
Working Paper: Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade (2005)
Working Paper: TRADE COSTS, TRADE BALANCES AND CURRENT ACCOUNTS: AN APPLICATION OF GRAVITY TO MULTILATERAL TRADE (2007)
Journal Article: Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade (2008)
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