Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/18993
Authors: 
Fazio, Giorgio
MacDonald, Ronald
Melitz, Jacques
Year of Publication: 
2005
Series/Report no.: 
CESifo Working Paper 1529
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 to desired aggregate trade balances and desired intertemporal trade.
Subjects: 
Feldstein-Horioka puzzle
trade costs
gravity model
home bias puzzle
current account
trade balance
JEL: 
F32
F10
Document Type: 
Working Paper

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