GLOBALISATION – Where globalisation was hiding, and how far it might go (James Anderson, Yoto Yotov, VOXEU)

The gravity equation of international trade raises several empirical puzzles relating to the decreasing impact of distance, the declining trade-related costs of bilateral trade, and the estimation of trade elasticities. This column introduces a new, ‘short-run gravity’ model which simultaneously resolves all three of the above-mentioned puzzles. The model estimates a 14% decline in the distance elasticity and shows that capacity reallocation raised world manufacturing trade by 75% between 1998 and 2006. Finally, an estimated structural parameter implies that the short-tun trade elasticity is about one-fourth of its long-run counterpart.