Time-varying trade cost (terms) and the distance puzzle

Richard Frensch () and Michael Rindler
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Richard Frensch: OS Regensburg, University of Regens-burg, ZU Friedrichshafen
Michael Rindler: ZU Friedrichshafen, ifo Institute München

No 399, Working Papers from Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies)

Abstract: We present a novel two-stage gravity specification with period-varying bilateral trade cost terms. We test our specification to confirm the benchmark result on declining international distance elasticities over time, using two new data sets. Analyzing period-varying bilateral trade cost derived from our specification offers additional insights: first, globalization has erased more than a third of the effect of distance on trade cost, mostly until the mid-nineties. Second, identifying period-varying bilateral trade cost separately for domestic vs. international trade offers a natural illustration to globalization – international trade cost are less persistent than domestic trade cost. Finally, reflecting the importance of general equilibrium adjustment, total bilateral trade cost – relating partial bilateral trade cost to multilateral resistances – are more appropriate to reflect globalization than partial bilateral trade cost.

Keywords: Gravity; geography; panel models (search for similar items in EconPapers)
JEL-codes: C23 F15 F40 O18 (search for similar items in EconPapers)
Pages: 24
Date: 2023-06
New Economics Papers: this item is included in nep-geo, nep-int and nep-opm
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