We calibrate the model using data on bilateral trade and MP flows, as well as business cycle and external account variables for the US. We then assess the contribution of our mechanism in explaining the observed patterns of trade and MP across countries.

suggesting that these flows are mainly substituting each other.

There is a lively debate about the impact of trade liberalization on economic growth measured as growth in real gross domestic product (GDP). Most of this literature focuses on the empirical relation between trade and growth. This paper investigates the theoretical relation between trade and...