The gravity model has been widely used to infer substantial trade flow effects of institutions such as customs unions and exchange rate mechanisms. McCallum [1995] found that the US-Canada border led to trade between provinces that is a factor 22 (2,200%) times trade between states and provinces, a spectacular puzzle in light of the low formal barriers on this border. We show that the gravity model usually estimated does not correspond to the theory behind it. We solve the 'border puzzle' by applying the theory seriously. We find that national borders reduce trade between the US and Canada by about 44%, while reducing trade among other industrialized countries by about 30%. McCallum's spectacular headline number is the result of a combination of omitted variables bias and the small size of the Canadian economy. Within-Canada trade rises by a factor 6 due to the border. In contrast, within-US trade rises 25%.

https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=256086

Gravity with Gravitas: A Solution to the Border Puzzle

Gravity equations have been widely used to infer trade flow effects of various institutional arrangements. We show that estimated gravity equations do not have a theoretical foundation. This implies both that estimation suffers from omitted variables bias and that comparative statics analysis is unfounded. We develop a method that (i) consistently and efficiently estimates a theoretical gravity equation and (ii) correctly calculates the comparative statics of trade frictions. We apply the method to solve the famous McCallum border puzzle. Applying our method, we find that national borders reduce trade between industrialized countries by moderate amounts of 20-50 percent.

/pdf/gravity-with-gravitas-a-solution-to-the-border-puzzle-4dn7us6msp.pdf

We construct estimates of external assets and liabilities for 145 countries for the period 1970-2004. We describe our estimation methods and present key features of the data at the country and the global level. We focus on trends in net and gross external positions, and the composition of international portfolios, distinguishing between foreign direct investment, portfolio equity investment, official reserves, and external debt. We document the increasing importance of equity financing and the improvement in the external position for emerging markets, and the differing pace of financial integration between advanced and developing economies. We also show the existence of a global discrepancy between estimated foreign assets and liabilities, and identify the asset categories that account for this discrepancy.

/pdf/the-external-wealth-of-nations-mark-ii-revised-and-extended-52xykubu60.pdf

The External Wealth of Nations Mark Ii: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004

This chapter focuses on the estimation and interpretation of gravity equations for bilateral trade. This necessarily involves a careful consideration of the theoretical underpinnings since it has become clear that naive approaches to estimation lead to biased and frequently misinterpreted results. There are now several theory-consistent estimation methods and we argue against sole reliance on any one method and instead advocate a toolkit approach. One estimator may be preferred for certain types of data or research questions but more often the methods should be used in concert to establish robustness. In recent years, estimation has become just a first step before a deeper analysis of the implications of the results, notably in terms of welfare. We try to facilitate diffusion of best-practice methods by illustrating their application in a step-by-step cookbook mode of exposition.

/pdf/gravity-equations-workhorse-toolkit-and-cookbook-1oadwbzcqo.pdf

Gravity Equations: Workhorse,Toolkit, and Cookbook

There is a global financial cycle in capital flows, asset prices and in credit growth. This cycle co‐moves with the VIX, a measure of uncertainty and risk aversion of the markets. Asset markets in countries with more credit inflows are more sensitive to the global cycle. The global financial cycle is not aligned with countries’ specific macroeconomic conditions. Symp toms can go from benign to large asset price bubbles and excess credit creation, which are among the best predictors of financial crises. A VAR analysis suggests that one of the determinants of the global financial cycle is monetary policy in the centre country , which affects leverage of global banks, capital flows and credit growth in the international financial system. Whenever capital is freely mobile, the global financial cycle constrains national monetary policies regardless of the exchange rate regime. For the past few decades, international macroeconomics has postulated the “trilemma”: with free capital mobility, inde pendent monetary policies are feasible if and only if exchange rates are floating. The global financial cycle transforms the trilemma into a “dilemma” or an “irreconcilable duo”: independent monetary policies are possible if and only if the capital account is managed. So should policy restrict capital mobility? Gains to international capital flows have proved elusive whether in calibrated models or in the data.  Large gross flows disrupt asset markets and financial intermediation, so the costs may be very large. To deal with the global financial cycle and the “dilemma”, we have the following policy options: ( a) targeted capital controls; (b) acting on one of the sources of the financial cyc le itself, the monetary policy of the Fed and other main central banks; (c) acting on the transmission channel cyclically by limiting credit growth and leverage during the upturn of the cycle, using national macroprudential policies; (d) acting on the transmission channel structurally by imposing stricter limit s on leverage for all financial intermediaries. We argue for a convex combination of (a), (c) and (d).

/pdf/dilemma-not-trilemma-the-global-financial-cycle-and-monetary-yk7w7zd08d.pdf

Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence

A monolithic composition includes alfuzosin in a polymeric matrix adapted to release 13-33% of the alfuzosin within 2 hours, 40-60% of the alfuzosin within 7 hours, and greater than 80% of the alfuzosin within 20 hours of administration. A unit dosage form includes: a heterogeneous mixture of alfuzosin hydrochloride anhydrate, lactose monohydrate, hydroxypropylmethylcellulose, polyvinylpyrrolidone and magnesium stearate, wherein the heterogeneous mixture is heterogeneously distributed throughout the unit dosage form. A manufacturing process includes: mixing a hydrophilic polymer and alfuzosin to provide a blend; granulating the blend to provide granules; drying the granules on a dryer to provide dried granules; sizing the dried granules to provide sized granules; mixing the sized granules with a lubricant to obtain a mixture; and compressing the mixture to obtain a tablet. A method of treating benign prostatic hyperplasia, includes administering to a patient the composition or unit dosage form once a day.

Alfuzosin tablets and synthesis

A tablet has a dispersible matrix of granules each containing an active agent in a sustained release matrix, wherein the tablet is monolithic and adapted to release the active agent over a predetermined time period according to a profile of dissolution including a zero order release phase. The tablet can further contain tablet excipients and/or a non-functional film coating. A method for providing a tablet of the invention is also disclosed.

Dosage form containing dispersible matrix of sustained release granules

PPP Strikes Back

We explore whether the pattern of international equity returns, equity portfolio flows, and exchange rate returns are consistent with the hypothesis that (unhedged) global investors rebalance their portfolio in order to limit their exchange rate exposure when there are (1) relative equity return; and (2) exchange rate shocks. We also explore whether (3) equity flow shocks influence the exchange rates and relative equity prices. In the estimation of the VAR system we do not impose any causal ordering upon the primitive shocks, but instead identify the system based on theoretical priors about the contemporaneous conditional correlations between the three variables. International data for the five largest equity markets are consistent with a theory in which equity returns and portfolio rebalancing are an important source of exchange rate dynamics.

Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows and Exchange Rates?

We analyze the effects of financial and trade globalization on the likelihood of financial crashes in emerging markets. While trade globalization always makes crashes less likely, financial globalization may make them more likely, especially when trade costs are high. Pessimistic expectations can be self-fulfilling and lead to a collapse in demand for goods and assets. Such a crash comes with a current account reversal and drops in income and investment. Lower-income countries are more prone to such demand-based financial crises. A quantitative evaluation shows our model is consistent with the main stylized facts of financial crashes in emerging markets.

Hélène Rey

Papers

Alfuzosin tablets and synthesis

Dosage form containing dispersible matrix of sustained release granules

PPP Strikes Back

Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows and Exchange Rates?

Globalization and Emerging Markets: With or without Crash?