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

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.
LanguageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-38
Number of pages39
Volume05
Publication statusPublished - 2005

Fingerprint

Trade balance
Current account
Trade costs
Gravity
Home bias
Feldstein-Horioka puzzle
Bilateral trade
Novelty
Tying

Keywords

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

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). Glasgow: University of Strathclyde.
Fazio, Giorgio ; Macdonald, Ronald ; Melitz, Jacques. / Trade Costs, Trade Balances and Current Accounts : An Application of Gravity to Multilateral Trade. 02. ed. Glasgow : University of Strathclyde, 2005. pp. 1-38
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Fazio, G, Macdonald, R & Melitz, J 2005 'Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade' 02 edn, University of Strathclyde, Glasgow, pp. 1-38.

Trade Costs, Trade Balances and Current Accounts : An Application of Gravity to Multilateral Trade. / Fazio, Giorgio; Macdonald, Ronald; Melitz, Jacques.

02. ed. Glasgow : University of Strathclyde, 2005. p. 1-38.

Research output: Working paperDiscussion paper

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