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Federal Reserve Bank of Chicago
Working Paper Series
What determines bilateral trade flows?
Marianne Baxter
Michael A. Kouparitsas
Abstract

This paper undertakes an exhaustive search for robust determinants of international trade, where "robustness" is tested using three popular empirical methods. The paper is frankly atheoretical: our goal is solely to establish statistically robust relationships. Along the way, however, we relate our results to the empirical results obtained by prior researchers and to the received theory of international trade. We find that robust variables include a measure of the scale of factor endowments; fixed exchange rates; the level of development; and current account restrictions. Variables that are robust under certain methods and sample periods include exchange rate volatility, an index of sectoral similarity, and currency union. However, the estimated coefficient on currency union is much smaller than estimates obtained by prior researchers.


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Marianne Baxter & Michael A. Kouparitsas, What determines bilateral trade flows?, Federal Reserve Bank of Chicago, Working Paper Series WP-05-11, 2005.
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Keywords: Business cycles ; Trade
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