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Swiss Journal of Economics and Statistics

, Volume 145, Issue 4, pp 421–442 | Cite as

Adjustment Dynamics of Bilateral Trade Flows: Theory and Evidence

  • Benjamin Jung
Open Access
Article
  • 32 Downloads

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.

JEL-Classification

F14 F15 

Keywords

international bilateral trade gravity model trust dynamic panel data 

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Copyright information

© Swiss Society of Economics and Statistics 2009

Authors and Affiliations

  1. 1.Universität HohenheimStuttgartGermany

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