Working Paper: NBER ID: w23458
Authors: James E. Anderson; Yoto V. Yotov
Abstract: 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 to long run trade elasticities equal to a micro-founded buyers' incidence elasticity, and (iv) tractable short and long run models of the extensive margin. Application to manufacturing trade of 52 countries during the globalization period 1988-2006 strongly supports the model. Results solve several time invariance and trade elasticity puzzles in the literature.
Keywords: gravity model; bilateral trade; trade costs; globalization
JEL Codes: F10; F14; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short run gravity (F12) | trade flows (F10) |
| long run gravity (F12) | trade flows (F10) |
| bilateral capacity (D86) | trade flows (F10) |
| trade costs (F19) | bilateral capacities (F35) |
| bilateral capacities (F35) | trade volume (F10) |
| trade costs vary with volume (F12) | trade flows (F10) |
| bilateral capacities adjust over time (J79) | trade costs (F19) |