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Risky Gravity

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  • Luciana Juvenal
  • Paulo Santos Monteiro

Abstract

We consider the canonical trade model with heterogeneous firms, love for variety and trade costs, and integrate it in the consumption CAPM model. This yields a structural gravity equation that includes an additional factor related to risk premia. Empirical evidence based on firm-level data confirms the importance of cross-sectional heterogeneity in risk and time-varying risk premia to shape bilateral trade flows. The structural gravity model augmented to account for fluctuations in risk premia offers a compelling explanation for trade collapses during abrupt economic downturns.

Suggested Citation

  • Luciana Juvenal & Paulo Santos Monteiro, 2024. "Risky Gravity," Journal of the European Economic Association, European Economic Association, vol. 22(4), pages 1590-1627.
    • Handle: RePEc:oup:jeurec:v:22:y:2024:i:4:p:1590-1627.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvad060
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