NBER Publications by Dennis Novy

What has driven trade booms and trade busts in the past and present? We derive a micro-founded measure of trade frictions from leading trade theories and use it to gauge the importance of bilateral trade costs in determining international trade flows. We construct a new balanced sample of bilateral trade flows for 130 country pairs across the Americas, Asia, Europe, and Oceania for the period from 1870 to 2000 and demonstrate an overriding role for declining trade costs in the pre-World War I trade boom. In contrast, for the post-World War II trade boom we identify changes in output as the dominant force. Finally, the entirety of the interwar trade bust is explained by increases in trade costs.

What drives globalization today and in the past? We employ a new micro-founded measure of bilateral trade costs based on a standard model of trade in differentiated goods to address this question. These trade costs gauge the difference between observed bilateral trade and frictionless trade. They comprise tariffs, transportation costs and all other factors that impede international trade but which are inherently difficult to observe. Trade costs fell on average by ten to fifteen percent between 1870 and 1913. We also use this measure to decompose the growth of global trade over that period and find that roughly 44 percent of the global trade boom can be explained by reductions in trade costs; the remaining 56 percent is attributable to economic expansion.