The Geography of Trade in Goods and Asset Holdings

Antonin Aviat () and Nicolas Coeurdacier
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Antonin Aviat: PSE (joint research unit CNRS-EHESS-ENPC-ENS), Postal: 48 bd Jourdan, 75014 PARIS, FRANCE, http://www.pse.ens.fr

No DR 06012, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: Gravity models have been widely used to describe bilateral trade in goods. Recently, Portes and Rey [1999] applied this framework to cross border equity flows and found that distance, which proxies information asymmetries in financial markets, is a surprisingly very large barrier to cross-border asset trade. We adopt here a different point of view and explore the complementarity between bilateral trade in goods and bilateral asset holdings. We jointly study trade in goods and banking assets in a simultaneous gravity equations framework using different instruments for both endogenous variables. To instrument trade in goods, we choose geographical variables (excluding distance) and data on bilateral transport costs. For asset holdings, we use legal similarities between countries and data on the international taxation of withheld capital. We find that the strong correlation between bilateral trade in goods and asset holdings is not simply due to distance: bilateral trade in goods generates bilateral asset holdings and vice versa. Those effects are of first order magnitude: a 10% increase in trade generates a 6 to 7% increase of asset holdings, and a 10% increase in banking claims induces a 2 to 3% increase in trade. Finally, we investigate the question of the remaining impact of distance. We find out that the impact of distance on trade in goods is only slightly reduced, while for asset holdings, a large part of the effect of distance is going through trade.

Keywords: Gravity Models; International Finance; International Trade; Simultaneous Equations (search for similar items in EconPapers)
JEL-codes: C31 F10 F36 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2006-10
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The geography of trade in goods and asset holdings (2007)
Working Paper: The geography of trade in goods and asset holdings (2007)
Working Paper: The geography of trade in goods and asset holdings (2007)
Working Paper: The geography of trade in goods and asset holdings (2004)
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