Sticky Gravity

Dennis Novy, Mario Larch and Leandro Navarro
Additional contact information
Mario Larch: University of Bayreuth
Leandro Navarro: University of Bayreuth

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: International trade flows show strong persistence over time. Standard static gravity models cannot rationalize this persistence and lack a micro-foundation for including lagged trade flows as a determinant of current trade. We develop a structural dynamic gravity framework in which persistence arises from firms’ sluggish adjustment of destination-specific prices, analogous to sticky prices in macroeconomics but operating at the bilateral level. The model delivers a gravity equation with lagged trade flows as a structural feature rather than an ad hoc add-on. We propose a novel estimation approach for dynamic gravity models that explicitly accounts for persistence. Empirically, we show that ignoring persistence can lead standard gravity estimates to substantially understate the effects of trade policy changes. As an application, we find that the estimated trade impact of regional trade agreements can increase by 30 percent or more once persistence is taken into account.

Keywords: Dynamic gravity; persistence; sluggish price adjustment; sticky prices; RTA, trade costs JEL codes: E31; F13; F14; F41 (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://warwick.ac.uk/fac/soc/economics/research/w ... /twerp_1609-novy.pdf

Related works:
Working Paper: Sticky gravity (2026)
Working Paper: Sticky Gravity (2026)
Working Paper: Sticky Gravity (2026)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1609

Access Statistics for this paper

More papers in The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Sheila Kiggins ().