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Title:Trade costs, trade balances and current accounts : an application of gravity to multilateral trade PDF Logo
Authors:Fazio, Giorgio
MacDonald, Ronald
Melitz, Jacques
Issue Date:2005
Series/Report no.:CESifo working papers 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
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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