Risky Gravity

Luciana Juvenal and Paulo Santos Monteiro

Journal of the European Economic Association, 2024, vol. 22, issue 4, 1590-1627

Abstract: We consider the canonical trade model with heterogeneous firms, love for variety and trade costs, and integrate it in the consumption CAPM model. This yields a structural gravity equation that includes an additional factor related to risk premia. Empirical evidence based on firm-level data confirms the importance of cross-sectional heterogeneity in risk and time-varying risk premia to shape bilateral trade flows. The structural gravity model augmented to account for fluctuations in risk premia offers a compelling explanation for trade collapses during abrupt economic downturns.

Date: 2024
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Working Paper: Risky Gravity (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:22:y:2024:i:4:p:1590-1627.

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