Working Paper: CEPR ID: DP13630
Authors: Cédric Tille; Arnaud Mehl; Martin Schmitz
Abstract: Does distance matter for the volatility of international real and financial transactions? We show that it does, in addition to its well-established relevance for the level of trade. A simple model of trade with endogenous markups shows that demand shocks have a larger impact on trade between more distant countries. We test this implication in two steps, relying on a broad range of real and financial transactions measures, as well as several different metrics of distance (physical, linguistic, and internet). We first show that during the Great Trade Collapse of 2007-09 international transactions fell more between countries that are more distant along the various metrics, and find that the different distance measures magnify each other’s respective impacts. We then focus on a longer panel analysis of trade in goods and show that trade is more volatile between more distant countries, with again a magnification pattern across metrics of distance.
Keywords: distance; gravity; volatility; international trade; international finance; great trade collapse
JEL Codes: F10; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| distance (R12) | trade volatility (F14) |
| demand shocks (E39) | trade contraction between distant countries (F29) |
| increase in physical distance by one standard deviation (C21) | decrease in trade in goods by 23% (F19) |
| increase in virtual distance (R12) | decrease in trade in goods by 15% (F19) |
| increase in linguistic distance (J69) | decrease in trade in goods by 5% (F19) |
| different distance metrics (C49) | amplify each other's effects on trade volatility (F69) |