The geography of trade in goods and asset holdings

Antonin Aviat and Nicolas Coeurdacier
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Antonin Aviat: DELTA - Département et Laboratoire d'Economie Théorique et Appliquée - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique

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Abstract: Gravity models have been widely used to describe bilateral trade in goods. Portes and Rey [Portes, R., Rey, H., 2005. The Determinants of Cross-Border Equity Flows. Journal of International Economics, 65(2), 269-296.] applied this framework to cross-border equity flows and found that distance, which proxies information asymmetries, is a surprisingly very large barrier to cross-border asset trade. We adopt a different point of view and explore the complementarity between bilateral trade in goods and bilateral asset holdings in a simultaneous gravity equations framework. Providing different instruments for both endogenous variables, we show that a 10% increase in bilateral trade raises bilateral asset holdings by 6% to 7%. The reverse causality is also significant, albeit smaller. Controlling for trade, the impact of distance on asset holdings is drastically reduced. Keywords: Gravity models; International finance; International trade; Simultaneous equations

Keywords: Gravity models; International finance; International trade; Simultaneous equations (search for similar items in EconPapers)
Date: 2007-03
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01045223
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Published in Journal of International Economics, 2007, 71, pp.22-51. ⟨10.1016/j.jinteco.2006.02.002⟩

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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 (2006)
Working Paper: The geography of trade in goods and asset holdings (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01045223

DOI: 10.1016/j.jinteco.2006.02.002

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