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

Giorgio Fazio, Ronald Macdonald, Jacques Melitz

Research output: Working paperDiscussion paper

9 Downloads (Pure)

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 in a world of multiple countries to desired trade balances and desired intertemporal trade.
Original languageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-38
Number of pages39
Volume05
Publication statusPublished - 2005

Keywords

  • Feldstein-Horioka puzzle
  • trade costs
  • gravity model
  • home bias puzzle
  • current account
  • trade balance

Fingerprint Dive into the research topics of 'Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade'. Together they form a unique fingerprint.

  • Cite this

    Fazio, G., Macdonald, R., & Melitz, J. (2005). Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade. (02 ed.) (pp. 1-38). University of Strathclyde.