Gravity and heterogeneous trade cost elasticities
Natalie Chen (Author), Dennis Novy (Author), Centre for Economic Policy Research (Great Britain) (Publisher)
How do trade costs affect international trade? This paper offers a new approach. We rely on a flexible gravity equation that predicts variable trade cost elasticities, both across and within country pairs. We apply this framework to popular trade cost variables such as currency unions, trade agreements, and WTO membership. While we estimate that these variables are associated with increased bilateral trade on average, we find substantial heterogeneity. Consistent with the predictions of our framework, trade cost effects are strong for 'thin' bilateral relationships characterised by small import shares, and weak or even zero for 'thick' relationships
eBook, English, 2021
Centre for Economic Policy Research, London, 2021