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N° 2002-01 |
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| January |
| Illusory Border Effects: Distance Mismeasurement
Inflates Estimates of Home Bias in Trade |
Keith Head
Thierry Mayer |
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| The measured effect of national
borders on trade seems too large to be explained by the apparently small border-related
trade barriers. This puzzle was first presented by McCallum (1995) and has gone
on to spawn a large and growing literature on so-called border effects. We argue
in this paper that, because distances are always mismeasured in the existing literature,
the border effects may have been mismeasured in a way that leads to a systematic
overstatement. Our goal here is to develop a correct measure of distance that
would be consistent for international as well as intra-national trade flows. We
show how use of the existing methods for calculating distance leads to “illusory"
border and adjacency effects. We then apply our methods to data on interstate
trade in the United States and inter-member trade in the European Union. We find
that our new distance measure reduces the estimated border and adjacency effects
but does not eliminate them. Thus, while we do not solve the border effect puzzle,
we do show a way to shrink it. |
Abstract |
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| Border effect, gravity equation, distance
measurement |
Keywords |
| F12, F15 |
JEL classification |
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