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

Micro-level data have had a profound influence on research in inter national trade over the last ten years. In many regards, this research agenda has been very successful. New stylized facts have been uncovered and new trade models have been developed to explain these facts. In this paper we investigate to what extent answers to new micro-level questions have affected answers to an old and central question in the field: how large are the welfare gains from trade? A crude summary of our results is: “So far, not much.” (JEL

/pdf/new-trade-models-same-old-gains-3aw5ojr3a4.pdf

New Trade Models, Same Old Gains?

This chapter discusses how applied researchers in corporate finance can address endogeneity concerns. We begin by reviewing the sources of endogeneity—omitted variables, simultaneity, and measurement error—and their implications for inference. We then discuss in detail a number of econometric techniques aimed at addressing endogeneity problems, including instrumental variables, difference-in-differences estimators, regression discontinuity design, matching methods, panel data methods, and higher order moments estimators. The unifying themes of our discussion are the emphasis on intuition and the applications to corporate finance.

/pdf/endogeneity-in-empirical-corporate-finance1-obm7n5t71j.pdf

Endogeneity in Empirical Corporate Finance1

This paper estimates the productivity gains from reducing tariffs on final goods and from reducing tariffs on intermediate inputs. Lower output tariffs can increase productivity by inducing tougher import competition, whereas cheaper imported inputs can raise productivity via learning, variety, and quality effects. We use Indonesian manufacturing census data from 1991 to 2001, which include plant-level information on imported inputs. The results show that a 10 percentage point fall in input tariffs leads to a productivity gain of 12 percent for firms that import their inputs, at least twice as high as any gains from reducing output tariffs. (JEL F12, F13, L16, O14, O19, O24)

/pdf/trade-liberalization-intermediate-inputs-and-productivity-37p1hwffrf.pdf

Trade Liberalization, Intermediate Inputs and Productivity: Evidence from Indonesia ∗

Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 cents for every dollar increase in home equity. Home equity-based borrowing is stronger for younger households, households with low credit scores, and households with high initial credit card utilization rates. Money extracted from increased home equity is not used to purchase new real estate or pay down high credit card balances, which suggests that borrowed funds may be used for real outlays. Lower credit quality households living in high house price appreciation areas experience a relative decline in default rates from 2002 to 2006 as they borrow heavily against their home equity, but experience very high default rates from 2006 to 2008. Our conservative estimates suggest that home equity-based borrowing added $1.25 trillion in household debt, and accounts for at least 39% of new defaults from 2006 to 2008.

/pdf/house-prices-home-equity-based-borrowing-and-the-u-s-4g45ck97fr.pdf

House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis

By considering a model with identical firms, Paul Krugman (1980) predicts that a higher elas ticity of substitution between goods magnifies the impact of trade barriers on trade flows. In this paper, I introduce firm heterogeneity in a simple model of international trade. When the distribu tion of productivity across firms is Pareto, which is close to the observed size distribution of US firms, the predictions of the Krugman model with representative firms are overturned: the impact of trade barriers on trade flows is dampened by the elasticity of substitution, and not magnified. In Krugman (1980), identical countries trade differentiated goods despite the presence of trade barriers because consumers have a preference for variety. If goods are less substitutable, con sumers are willing to buy foreign varieties even at a higher cost, and trade barriers have little impact on bilateral trade flows. Total exports from country A to country B are given by the following expression:

/pdf/distorted-gravity-the-intensive-and-extensive-margins-of-46d0bo2yl5.pdf

Distorted Gravity: The Intensive and Extensive Margins of International Trade

What is the impact of real estate prices on corporate investment? In the presence of financing frictions, firms use pledgeable assets as collateral to finance new projects. Through this collateral channel, shocks to the value of real estate can have a large impact on aggregate investment. To compute the sensitivity of investment to collateral value, we use local variations in real estate prices as shocks to the collateral value of firms that own real estate. Over the 1993-2007 period, the representative US corporation invests $0.06 out of each $1 of collateral.

The Collateral Channel: How Real Estate Shocks Affect Corporate Investment

/pdf/the-collateral-channel-how-real-estate-shocks-affect-2i2oy4px8l.pdf

The Collateral Channel: How Real Estate Shocks affect Corporate Investment

By considering a model with identical firms, Paul Krugman (1980) predicts that a higher elasticity of substitution between goods magnifies the impact of trade barriers on trade flows. In this paper, I introduce firm heterogeneity in a simple model of international trade. When the distribution of productivity across firms is Pareto, which is close to the observed size distribution of US firms, the predictions of the Krugman model with representative firms are overturned: the impact of trade barriers on trade flows is dampened by the elasticity of substitution, and not magnified.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2153694_code761513.pdf?abstractid=2153694&mirid=1&type=2

Motivated by empirical evidence I uncover on the dynamics of French firms’ exports , I offer a novel theory of trade frictions. Firms export only into markets where they have a contact. They search directly for new trading partners, but also use their existing network of contacts to search remotely for new partners. I characterize the dynamic formation of an international network of exporters in this model. Structurally, I estimate this model on French data and confirm its predictions regarding the distribution of the number of foreign markets accessed by exporters and the geographic distribution of exports. (JEL D85, F11, F14, L24) This paper proposes a new theory of the frictions associated with international trade, and more generally the frictions that affect the ability of firms to trade with each other. Samuelson (1954) and later Krugman (1980) recognized the key impor tance that trade frictions play not only in shaping the patterns of international trade, but also in determining relative factor prices between countries, and ultimately comparative development. Despite the central role they play in trade models, trade frictions remain largely unexplained, and we only have a very crude formalization of those frictions. Samuelson (1954), Krugman (1980) and most of the trade litera ture assume “iceberg”-type trade costs, a simple proportional cost. Melitz (2003); Helpman, Melitz, and Rubinstein (2008); and Chaney (2008) recognize the impor tance of the extensive margin of trade in determining firm level and aggregate flows, and introduce a fixed cost in addition to the usual iceberg cost. Arkolakis (2010)

/pdf/the-network-structure-of-international-trade-56v2qz3xqx.pdf

Thomas Chaney

Papers

Distorted Gravity: The Intensive and Extensive Margins of International Trade

The Collateral Channel: How Real Estate Shocks Affect Corporate Investment

The Collateral Channel: How Real Estate Shocks affect Corporate Investment

Distorted Gravity: The Intensive and Extensive Margins of International Trade

The Network Structure of International Trade