NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Gravity, Scale and Exchange Rates

James E. Anderson, Mykyta Vesselovsky, Yoto V. Yotov

NBER Working Paper No. 18807
Issued in February 2013
NBER Program(s):   IFM   ITI

We develop a structural gravity model that introduces scale effects in bilateral trade. Scale effects and incomplete passthrough give two channels through which exchange rates have real effects on trade patterns. Estimates from Canadian provincial trade data identify these effects through their interaction with the US border. We find statistically and quantitatively significant economies of scale in cross-border trade in almost 2/3 of sectors. Real effects of exchange rate changes on trade are found for 12 of 19 goods sectors and none of 9 services sectors.

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Document Object Identifier (DOI): 10.3386/w18807

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