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

Giorgio Fazio, Ronald Mac Donald and Jacques Melitz
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Ronald Mac Donald: Crest

No 2005-12, Working Papers from Center for Research in Economics and Statistics

Abstract: 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.

Pages: 39
Date: 2005
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade (2008)
Working Paper: TRADE COSTS, TRADE BALANCES AND CURRENT ACCOUNTS: AN APPLICATION OF GRAVITY TO MULTILATERAL TRADE (2007)
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)
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