Trade Costs, Trade Balances and Current Accounts : An Application of Gravity to Multilateral Trade
In this paper we test the well-known hypothesis of Obstfeld and Rogoff (2000) that tradecosts are the key to explaining the so-called Feldstein-Horioka puzzle. Using a gravityframework in an intertemporal context, we provide strong support for the hypothesis and wereconcile our results with the so-called home bias puzzle. Interestingly, this requires a fundamentalrevision of Obstfeld and Rogoff’s argument. A further novelty of our work is in tyingbilateral trade behavior to desired aggregate trade balances and desired intertemporaltrade.
Year of publication: |
2005
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Authors: | Fazio, Giorgio ; Mac Donald, Ronald ; Melitz, Jacques |
Institutions: | Centre de Recherche en Économie et Statistique (CREST), Groupe des Écoles Nationales d'Économie et Statistique (GENES) |
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