Adjustment Dynamics of Bilateral Trade Flows: Theory and Evidence

Benjamin Jung

Swiss Journal of Economics and Statistics (SJES), 2009, vol. 145, issue IV, 421-442

Abstract: In this paper, I introduce a trade-promoting "invisible asset" into the standard Krugman (1980) model of international trade. It can be interpreted as trust that accumulates as an externality in proportion to successful international transactions. I use this framework to theoretically derive a dynamic gravity equation and to discuss adjustment dynamics. I provide new evidence on adjustment rates of bilateral trade flows. On average, 23% of the gap to the steady-state trade flow are closed each year. However, dynamic regressions yield long-run trade policy effects which are comparable to static estimates.

Keywords: International bilateral trade; Gravity model; Trust; Dynamic panel data (search for similar items in EconPapers)
JEL-codes: F14 F15 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ses:arsjes:2009-iv-5

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