Distance(S) and the Volatility of International Trade(S)

We show that distance matters for the volatility of international trade and financial transactions beyond its well-known relevance for their level. We identify several candidate explanations from theory, which we test on alternative measures of distance and a broad range of trade and financial transactions. We conduct event studies of two noteworthy episodes (the 2007-09 global financial crisis and the 2020 Covid-19 pandemic outbreak) and a longer panel data analysis. Physical distance impacts the volatility of international trade and finance, as do virtual and linguistic distances which proxy for ease of communication. A key mechanism suggested by our findings is that distance captures higher uncertainty associated with assessing conditions in more remote economies. Physical distance matters for international trade in services and finance, in addition to trade in goods. Ease of communication also matters and dampens the impact of physical distance