Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade

Giorgio Fazio, Ronald MacDonald and Jacques Melitz

No 1529, CESifo Working Paper Series from CESifo

Abstract: In this paper we test the well-known hypothesis of Obstfeld and Rogoff (2000) that trade costs are the key to explaining the so-called Feldstein-Horioka puzzle. Using a gravity framework in an intertemporal context, we provide strong support for the hypothesis and we reconcile our results with the so-called home bias puzzle. Interestingly, this requires a fundamental revision of Obstfeld and Rogoff’s argument. A further novelty of our work is in tying bilateral trade behavior to desired aggregate trade balances and desired intertemporal trade.

Keywords: Feldstein-Horioka puzzle; trade costs; gravity model; home bias puzzle; current account; trade balance (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-ifn and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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https://www.cesifo.org/DocDL/cesifo1_wp1529.pdf (application/pdf)

Related works:
Journal Article: Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade (2008)
Working Paper: TRADE COSTS, TRADE BALANCES AND CURRENT ACCOUNTS: AN APPLICATION OF GRAVITY TO MULTILATERAL TRADE (2007)
Working Paper: Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade (2005)
Working Paper: Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade (2005)
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