Short run gravity is a geometric weighted average of long run gravity and bilateral capacity. The model features (i) joint trade costs endogenous to bilateral volumes, (ii) long run gravity as a limiting case of efficient investment in bilateral capacities, (iii) a structural ratio of short run...

We develop a structural gravity model that introduces scale effects in bilateral trade. Scale effects and incomplete passthrough give two channels through which exchange rates have real effects on trade patterns. Estimates from Canadian provincial trade data identify these effects through their...