Gravity in International Finance

Yohei Okawa and Eric van Wincoop

Journal of International Economics, 2012, vol. 87, issue 2, 205-215

Abstract: The past decade has witnessed an explosion of papers estimating gravity equations for cross-border financial holdings without much of a theoretical foundation. In this paper we develop a theory for bilateral asset holdings that takes a gravity form. We discuss how to estimate international financial frictions and conduct comparative statics analysis within the context of the theory. We also find though that reasonable extensions of the model no longer generate a gravity form. While this does not significantly complicate estimation and comparative statics analysis, it raises questions about the empirical validity of gravity specifications for cross-border financial holdings that need to be addressed in future work.

Keywords: Gravity; Cross-border asset holdings; International finance; Global frictions (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (152)

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Working Paper: Gravity in International Finance (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:87:y:2012:i:2:p:205-215

DOI: 10.1016/j.jinteco.2012.01.006

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