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Adjustment Dynamics of Bilateral Trade Flows: Theory and Evidence

Swiss Journal of Economics and Statistics volume 145, pages 421–442 (2009)Cite this article

Summary

In this paper, I introduce a trade-promoting ‘invisible asset’ into the standard Krugman (1980) model of international trade. It can be interpreted as trust that accumulates as an externality in proportion to successful international transactions. I use this framework to theoretically derive a dynamic gravity equation and to discuss adjustment dynamics. I provide new evidence on adjustment rates of bilateral trade flows. On average, 23% of the gap to the steady-state trade flow are closed each year. However, dynamic regressions yield long-run trade policy effects which are comparable to static estimates.

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Authors and Affiliations

  1. Universität Hohenheim, 70593, Stuttgart, Germany

    Benjamin Jung

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  1. Benjamin Jung
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Correspondence to Benjamin Jung.

Additional information

I am grateful to Jose de Sousa, Peter Egger, Gabriel Felbermayr, Wilhelm Kohler, Marcelo Olarreaga, Davide Sala, and Dieter Urban for stimulating discussions, and to participants at a Workshop at the Center for Economic Studies (CES) in Munich, at the Annual Meeting of the Swiss Society of Economics and Statistics in Geneva, and at the Annual Conference of the European Trade Study Group in Rome for comments. Part of the paper was written when I was visiting scholar at The Leverhulme Centre for Research on Globalisation and Economic Policy (GEP). Financial support from the German Research Foundation (DFG) through a PhD fellowship is gratefully acknowledged. All remaining errors are mine.

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Jung, B. Adjustment Dynamics of Bilateral Trade Flows: Theory and Evidence. Swiss J Economics Statistics 145, 421–442 (2009). https://doi.org/10.1007/BF03399289

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