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Gravity in Transition

Author

Listed:
  • James Anderson

    (Boston College)

  • Yoto Yotov

    (School of Economics, Drexel University)

Abstract

We propose a reduced-form transitional gravity model and an accompanying flexible reduced-form estimation approach. The Lucas-Prescott adjustment model is extended to allow for lag-interval-varying depreciation-cum-adjustment-cost of bilateral trade capacities. The resulting lag-interval-varying trade elasticities vary from 0.4 in the short run to 4.8 in the long run. Long-run equilibrium is reached in about 14-15 years. The model rationalizes trade elasticities that are less than one and offers a potential solution to the ‘international elasticity puzzle’ - the discrepancy between trade elasticities from the trade and macro literatures. Theories of dynamic adjustment in trade costs are supported, and phasing-in effects of FTAs are explained.

Suggested Citation

  • James Anderson & Yoto Yotov, 2025. "Gravity in Transition," Working Papers 2025004, Center for Global Policy Analysis, LeBow College of Business, Drexel University.
    • Handle: RePEc:drx:wpaper:2025004
    as

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    File URL: https://www.lebow.drexel.edu/sites/default/files/2025-01/wp2025004-gravity-transition.pdf
    File Function: First version, 2025
    Download Restriction: no
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    More about this item

    Keywords

    Short vs. Long Run; Gravity Estimation; Trade Elasticity;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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